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COEKRIGHT DEPOSIR 



BONDS AND 
STOCKS ^ 



THE ELEMENTS OF SUCCESSFUL 
INVESTING 



BY 

ROGER W. BABSON 



PUBLISHED BY 
BABSOX'S STATISTICAL ORGANIZATION 

( INCORPORATED) 
WELLESLEY HILLS, MASS. 









First Edition Copyrighted, 1912 
Second Edition Copyrighted, 1913 

by 

ROGBB W. BABSON 



APR ! I 19(4 

©CI.A371323 



BONDS AND STOCKS. 
The Elements of Successful Investing. 

CONTENTS. 

Preface . . 5 

Section I. 

Introductory Suggestions. 
CHAP. 

1 The Young Man's Credit .... 9 

2 Selecting a Bank 19 

3 Suggestions for the Investor ... 40 

4 The Investor's Vocabulary .... 52 

Section II. 

Elements of Successful Investing. 

5 Different Classes of Corporations Issu- 

ing Securities 86 

6 What Kind of Bonds to Buy . .' . 97 

7 Listed and Unlisted Securities . . . 117 

8 Selecting Railroad Securities (Bonds) 146 

9 How to Bead a Railroad Report . . 158 

10 Selecting Railroad Securities (Stocks) 173 

11 Electric Railway Securities . . . 188 

12 Lighting Securities . . . . . . 205 

13 , Telephone Securities 218 ^ 

14 Water Power Securities . . . . 236 

15 Municipal Securities ..... 252 

16 Exchanging Investments .... 277 

17 Defaulted Bonds ...... 293 

18 Copper Stocks 309 

19 Mining Securities 322 

Section III. 

Supplementary Suggestions. 

20 Money Market and Investment Prices . 338 

21 Effect of Gold Production on Security 

Prices 354 

22 Investing in New Propositions . . 378 

23 Conelnsion . 390 



ALTHOUGH obtained from sources 
believed to be accurate, the informa- 
tion and opinions given in this book 
are not guaranteed, and the pubhshers and 
author submit them with this distinct 
understanding. 

R. W. B. 



PREFACE. 

MUCH attention is given today to public 
education. We have various schools and 
colleges for almost every conceivable pur- 
pose except for the taking care of property. When 
it comes to the science of investins" money, very 
few people make it a question for thought and 
study. The great majority of investors do not 
know one investment from another, but depend to 
a large extent on hearsay. A man will spend 
from ten to fifteen years of his life in preparation 
so as to thoroughly master a vocation, but he 
expects to enter the investment field with very 
little, if any, practical training on the subject of 
investments and the science of investing money. 
To make a success of any business, the funda- 
mental principles must be thoroughly understood, 
but fundamentals cannot be mastered without 
study. 

A few years ago, absolute safety with 3-1/2 to 
4% income was considered an investment, whereas 
a 5% return was considered a speculation. Only 
recently, however, one of the large banks in Eng- 
land failed — not because it had been investing in 



6 BONDS AND STOCKS 

unsafe securities, but because it had confined its 
investments to tbe British Consols and securities 
of a similar high grade. In other words, it failed 
because of the approved excellence of its invest- 
ments ! It was not many years ago that the British 
Consols were selling at 112, or thereabouts, and 
they have since dropped to around 80. When we 
consider that practically the best investment in the 
world can behave in this manner, are we not some- 
times justified in being sceptical in regard to the 
securities which are being offered at the present 
day? 

The British Consols are not the only securities, 
of course, which have shown this decline, since 
practically all the conservative bonds have dropped 
in a similar manner. The fact of this great decline 
has caused the investing public to seek securities 
which pay a greater income than 3-1/2 and 4%. 
The field which has naturally opened up to them 
is that of Public Utilities which, a few years ago, 
were considered anything but conservative. There 
are many securities of electric railways, lighting, 
telephone, industrials and water power properties 
which today form a very desirable form of invest- 
ment. One, however, must be thoroughly informed 
on the fundamental principles underlying the 
security of these newer issues, as well as other 
classes of investments, before making any pur- 
chases. 

This demand for a greater income has in another 
way naturally led to greater speculation. As there 
are many ways of making money by improper 



PREFACE 7 

uses of capital, it is ^vell to remember that, funda- 
mentally, making money witli safety must mean 
the servino' of some one else to a sutficient extent 
to pay for the j^i'ofit rendered. If one buys 
or sells a carload of corn for general consumption, 
he is doing a distinct service and at the same time 
is being paid for so doing. In speculation, how- 
ever, one expects to violate this fundamental prin- 
ciple, and with very little trouble or exertion on his 
part, to obtain a handsome return on his money. 

Here is a man who can earn from $2 to $20 a day 
in some legitimate occupation. It looks small. 
In the stock market he has made $100 in one day. 
Why not continue ? Why stick to his paltry day's 
pay when this opportunity offers ? A quarter 
picked up in the street is wealth, whereas money 
earned by giving an equivalent is almost begrudged. 
A man plays the stock market all the winter, and 
at the end of the winter finds he has made just 
$100 net. ''But on the other side of the account," 
he says, ''I haven't added up the whiskeys, cigars, 
headaches, loss of sleep or the dreary, miserable 
days I have spent during this time." Could he 
not have made much more in some other way ? 

A man will work hard in politics for two theatre 
tickets, because he feels somehow that they have 
come without the sweat of his brow ; but it is with 
the sweat of his brow that his real income is 
obtained. One who speculates gradually notices 
that the customers in that office are constantly 
changing. The reason for this can be easily seen, 
but few have the courage to analyze the same. 



8 BONDS AND STOCKS 

There are some investments which are espe- 
cially adapted to various individuals in differoiir 
classes of life. There are other investments for 
national banks, savings banks, trust companies, 
life and fire insurance companies, estates, trust- 
funds, guardians, and bonds for the surplus funds 
of any business. Innumerable bonds and stocks 
which are especially adapted to the private investor 
are on the "market. 

The properties in which we invest should be of 
a useful, permanent and steady nature. We 
should not only be familiar with the present con- 
ditions of any property, but should also study the 
past and future. We should endeavor not only to 
study the surface conditions, but we should cer- 
tainly get down to the fundamental principles and 
work up from there. This is not a world of acci- 
dents or chance, and we cannot expect to see the 
stars peeping out at noon day. Neither can we 
hope to acquire great riches by profiting from cer- 
tain tips or by not giving the other man due labor 
or pay for whatever we receive. 

The field of investments certainly oifers many 
attractions but, anyone who is unwilling to give 
this subject careful and definite study should 
employ his money in other lines with which he is 
more familiar. Investing certainlj^ is a profes- 
sion and must be prepared for accordingly. 



CHAPTER I. 

THE YOUNG MAN'S CREDIT. 

Why He Needs It and How He Can Get It. 

LOOKING out of the window of a large 
Chicago hotel, one obtains a view np La 
Salle Street which, as all western readers 
know, is the Wall Street of Chicago, our great 
western metropolis, and which some day should be 
the financial center of America. Towards Madi- 
son Street, can be seen great bank buildings 
unequaled even in New York or any other world 
city, unless it be Paris or Berlin. But it is not 
so much the present conditions which are impres- 
sive, as it is the thought of Chicago about twenty 
years ago, when these same great banks were in 
small rented offices, and when only very f ew^ build- 
ings on the street exceeded four stories in height 
compared with the great sky-scrapers of today. 

But this is not all ; for as these great banks have 
grown, their customers have also increased in 
wealth and influence. An illustration will empha- 
size this point. Some twenty years ago, two 
young men came from a little town in Nebraska 
to Chicago to earn their living in any way possible. 
They were living in the humblest circumstances, 
working for one dollar a day with absolutely no 
acquaintances, friends nor even a trade. In fact, 
to one trained in a conservative eastern manner, 
it seemed that they did not have one chance in ten 
thousand of even getting a living. The longer the 

\ 



10 BONDS AND STOCKS 

boys stayed, the more difficult their position seemed 
likely to become, for times were very hard in 
Chicago during the early nineties and the city was 
flooded with unemployed. How^ever, they worked 
hard and were always ready to do the next thing 
whatever it might be; moreover, it was absolutely 
impossible to discourage them. Gradually they 
attracted the attention of one or two men of means. 
These men saw that the boys were absolutely 
honest, of exceptionally good habits and training, 
and unconsciously these boys created a credit with 
these men. 

It is sufficient to say that they now live in a 
suburb of Chicago where they each have a most 
beautiful home, and are surrounded with every 
comfort that an honest American can desire. In 
short, today they absolutely own one of Chicago's 
great mail order houses, and their name is a house- 
hold word in almost every home of these United 
States, all of which is the result of credit estab- 
lished in the early days. 

. Banks and the People are Dependent 
Upon Each Other. 

This is only one illustration of tens of thousands 
which might be given showing how intimately 
related are the banks and the people of any com- 
munity. The banks of Chicago could not have 
grown in the past twenty years, as is so impres- 
sively evident without these boys and others like 
them developing great business organizations which 
gather into Chicago millions of dollars each day. 



THE YOUNG MAN'S CREDIT 11 

On the otlier hand, these boys could not have grown 
had they not established a credit, and had it not 
been for the banks which financed them, or 
financed the firms from whom they purchased. 

The moral of this narrative is : — to the banker ; 
take care of the small depositor and the small 
borroAver. Eemember that although to-day's busi- 
ness may depend upon how you treat the large 
depositor, yet your growth and your condition 
twenty years hence depends upon how you treat 
the small man wdio now has only a few hundred 
dollars in his account, but who is endeavoring to 
establish credit. To the young man, open a bank 
account. In fact you should have two bank ac- 
counts, one for your savings and one for a check 
account. These should be your first two invest- 
ments. 

Those who are large investors and who buy and 
sell about once in two years in accordance with the 
changes in fundamental conditions always have 
large bank accounts preparatory to purchasing 
securities when the proper time comes. Many 
people say, ^'During the next period of low prices, 
I am going to buy some good securities" ; but they 
make no actual .preparation for the same, and when 
said time comes, they have no money with which to 
buy. The keen investor sells his securities, real 
estate and other investments when they can be sold, 
and builds up a large bank account with the pro- 
ceeds thereof. Then when the trouble comes and 
prices of stocks, bonds, real estate and commodities 
fall, he has the ready money, and is able to help 



12 BONDS AND STOCKS 

save the situation and at the same time, make a 
handsome profit. 

Let us return to the Chicago illustration and 
note that these men obtained their start through 
establishing a credit, ^ow the four corner stones 
of business success are : 
!.• Character 

2. Health 

3. Intelligence and Judgment 

4. Credit 

Given these four, any man should succeed; but, 
omit any one of these four — although he may 
apparently succeed — his success will be only tem- 
porary. All permanent success depends upon the 
development of these four fundamental factors. 
All four factors are important, but we will limit 
ourselves to the last; namely, credit. 

There are many ways of acquiring credit, yet 
the easiest, most satisfactory and most useful is to 
connect one's self with tAvo local banks. Many 
refer to banks only as a place for depositing money ; 
but this is the least of the many reasons why a 
young man should have one or more bank accounts. 
We will give two: 

(1) To gradually establish a credit for later 
use. 

(2) To create a source of advice relative to 
financial matters. 

Establishing a Bank Credit. 

To establish a credit, a man must begin early in 
life. The man who has not established a credit 



THE YOUNG MAN'S CREDIT 13 

before he is thirty-five is greatly handicapped. 
Therefore, as bank accounts are the best means of 
creating such a credit, young men should open 
accounts just as early in life as possible. To buy 
even a share of stock or a foot of ground before 
having two bank accounts is a vital mistake. Some 
think that if they have property, they can readily 
obtain a loan from a bank whether or not they have 
ever been a customer of a bank. This is a mis- 
taken idea. When money is abnormally plentiful, 
any man with property may doubtless be able to 
borrow on security from some bank of which he is 
not a regular depositor, but such is the exception. 
Moreover, at such times a man does not usually 
need to borrow, because when money is cheap, 
either all customers are promptly paying their 
bills, or else business is so depressed that there is 
little object for one to borrow. The average man 
is most anxious for money when rates are high, 
and banks have little or none to lend. It is then 
that the banks limit their loans to customers ; and 
furthermore loan first to those who have been the 
longest and most profitable customers. Therefore, 
every young man should be urged to use his very 
first savings for the establishment of a savings 
account, and to open a checking account before 
buying a share of stock or a foot of land or any 
other property. 

Credit to a large extent means ''favorahh 
acquaintance/' The depositor who calls at the 
hanh only once a year, has not such good ''credit" 
as the one ivho calls each month. Better still, the 



14 BONDS AND STOCKS 

young man who is paid weekly should call once a 
week and deposit his salary, in the checking 
account of a local bank. When depositing said 
salary, he should speak a pleasant word to the 
teller and gradually acquire the good will and 
friendship of the officers and directors. Once a 
month or once a quarter — whenever interest goes 
on deposit in the savings bank — he should with- 
draw from his checkings account (upon which he 
probably is not receiving interest) such portion as 
he desires to deposit in his savings account — in the 
other bank. This enables a young man to call at 
the commercial bank once a week, and at the 
savings bank once a month or so, and thus gradual- 
ly acquire the acquaintance and good will of both 
institutions which means CREDIT. 

The young man, however, must not be content 
with simply opening two accounts as early as 
possible and systematically making deposits there- 
in, but he must have these accounts of a size to be 
worth while. The average depositor fails to realize 
that many accounts today show oitr banks a distinct 
loss, and the only reason why , a bank does not 
refuse them is because the officers hope that some 
day they will be large enough to be profitable. 
However, although a bank will not refuse a small 
account, yet a young man cannot expect to acquire 
much of a credit upon which some day to borrow, 
unless his account is profitable. Therefore, young 
men should be urged to carry good accounts. 
Don't be stingy with a bank. Remember that some 
day it will be your best friend. If you wish to use 



THE YOUNG MAN'S CREDIT 15 

the bank later, allow it to make money on your 
business now. Be broad ganged and don't sharpen 
the pencil too finely, but remember the man who 
held the penny so near his eye that he shut from 
view the entire world. Remember how the farmer 
must spend money on seed and dressing; how the 
physician must spend years on study and practice. 
Remember that credit, like everything else that is 
good, cannot be obtained quickly or for nothing, 
but has its price. 

But there are other reasons why young people 
should open bank accounts. It is very advisable 
to pay bills by checks. This not only safe-guards 
one by having an automatic receipt, but it makes 
a good impression on the merchant to receive a 
check from a vouno; m.an. It shows a merchant 
that his customer has a bank account, and thus the 
young man indirectly establishes a credit with the 
merchants. Having bank accounts enables one to 
quickly cash checks, remit money, give references, 
and serves a host of other purposes in addition to 
aiding in the establishment of a credit. 

Obtaining Advice in Financial Matters. 

For the young investor to attempt to select safe 
securities without some outside honest and experi- 
enced aid, is a great mistake. As one begins to 
study and acquire experience, he is of course, less 
dependent upon the advice of another; but when 
investing his first thousand dollars, the small 
investor should go to his bank for aid. Although 
it mav not necessarily be wise to buv what the bank 



16 BONDS AND STOCKS 

recommends, jet one should never buy what the 
bank disapproves. 

Let ns assume that a young man in St. Louis has 
saved three thousand dollars of which one thousand 
is deposited in a national bank and two thousand in 
a trust company, which latter amount draws inter- 
est. The young man, however, is convinced that 
he can obtain a higher rate of interest — say Rve 
per cent. — ^by purchasing some one of the many 
bonds which he sees advertised in the papers and 
magazines. 

He has sense enough, however, to know that not 
all which are advertised are safe, and he is anxious 
to know how to select the best bond for his pur- 
pose. If the young man has no bank accounts and 
especially has not acquired the friendship and 
good will of a commercial l)ank through a check- 
ing account, it is difficult to realize how he can 
avoid losing money when attempting to invest. 
One might say at first thought, that he could go to 
a good bond house and leave it with them; but 
how does the average investor know a reliable bond 
house from an unreliable one ? Certainly a firm 
is not reliable because it advertises largely, or 
because it has beautiful offices and a large force of 
salesmen! Therefore, the best way for the in- 
vestor to obtain honest, intelligent information as 
to investments is either through some bank in 
which he has an account of sufficient size to cause 
said bank to give him time and thoughtful atten- 
tion, or so perfect himself by means of a definite 
study of investments that he becomes self-reliant. 



THE YOUNG :MAN'S CREDIT 17 

How manj may have wondered why two 
accounts, or rather accounts with two different 
banks are recommended. The St. Louis investor 
above cited draws his money from his savings 
account with which to make his first purchase, and 
it is very awkward to ask advice of a bank from 
which one is drawing the money. Consequently 
the commercial bank where one has his checking 
account is first appealed to for advice. Such a bank 
may be requested to recommend certain definite 
bonds, or one or more reliable bond houses to whom 
the investor may write. When writing to one of 
these bond houses, the investor may ask for a ''first 
mortgage underlying lien which is absolutely safe 
and yields about five per cent." After receiving 
a list from the bond house (or houses in case the 
bank recommends more than one) the investor can 
then ask the opinion of his commercial bank as to 
which bond it would select. 

The commercial bank will probably choose two 
issues, so that when depositing in the savincrs hank, 
the depositor can ask the treasurer of this other 
bank whether or not he believes ''either of these 
two bonds to be absolutely safe, and if both are 
safe, which of the two is the better ?" In short, 
when the investor has found an issue which, first, 
is recommended by a firm that the commercial 
bank recommends, — and secondly, is approved by 
both the commercial bank and the savings bank, he 
may be reasonably sure that such a bond is abso- 
lutely safe to buy, and the sooner he purchases it 
the better. 



18 BONDS AND STOCI^S 

( Briefly, if all small investors will follow this 
general course, not only will tliey eliminate losses, 
but the increased bank accounts will so interest the 
banks that henceforth they will give special atten- 
tion to all such advisory work. Of course as the 
investor becomes more experienced, he is less 
dependent upon his banks for advice ; but, on the 
other hand, he later will have more money at stake, 
and he will always find it of value to be able to 
consult with such institutions. 

Moreover, their advice is not wanted for the 
purchase of stocks and bonds alone. When pur- 
chasing real estate, and especially when desirous of 
knowing the standing or credit of any manufactur- 
ing or mercantile firm with which the depositor 
may have business relations, the knowledge, experi- 
ence and the good will of two banks will be found 
to be of great assistance. 

The small investor who starts out in this way is 
building his house upon a firm stone foundation ; 
but he who tries to get on without always having 
two good bank accounts, and expects to obtain his 
advice for nothing is building his house on a 
foundation of sand, and some day he will either 
have all his savings washed away or make a large 
loss. Good advice — like everything else that is 
good — cannot be obtained without giving some- 
thing in return, and the young man who sometime 
may desire the aid of one or more good banks 
should start in at once and give these banks a good 
account. 



CHAPTER II. 

The Selection of a Bank with Suggestions to 
Bank Employees. Published State- 
ments of Banks. 

EVERY national bank is compelled by law to 
pubhsli in a local paper at certain intervals 
a statement of its conditions, and this also 
applies to a limited extent to most trust companies 
and state banks. Whether or not, however, one 
sees the published statement in a newspaper, he 
can always obtain a printed statement from his 
bank. This statement usually appears in the form 
of a little leaflet or circular, which in addition to 
giving a condensed trial balance of the bank's con- 
dition, gives a list of the names of the officers and 
directors. 

Although there are many suggestions as to the 
means of determining the strength of a bank in 
order to select one in which to deposit, yet all of 
these methods practically resolve down to a study 
of this statement. The following is a statement 
of a small bank as published in the local paper 
and is a typical illustration. 

RESOURCES 

Loans and Discounts $272,415.2o 

Overdrafts, secured and unsecured .... 124.03 

United States Bonds to secure circulation . . 50.000.00 

Securities. Bonds, etc 330.646.90 

Banking House, Furniture and Fixtures . . . 2,000.00 
Due from State and Private Banks and Bankers, 

Trust Companies and Savings Banks . . 1,486.54 

Due from approved Reserve Agents .... 69,788.34 



20 . BONDS AND STOCKS 

Check J and other cash items 57,35 

Fractional Paper Currency, Nickels and Cents . 446.12 

Lawful Money Reserve in Bank — namely: 

Specie $16,839.45 

Legal-tender Notes 8,000.00 24,839.45 

Redemption Fund with United States Treasurer 

live per cent of circulation 2 500.00 

Total = . $754,303.98 

LIABILITIES 

Capital Stock paid in $ 50,000.00 

Surplus Fund • • .• 25,000.00 

Undivided Profits, less Expenses and Taxes paid 2,804,21 

National Banknotes outstanding 49,300.00 

Dividends unpaid 1,500.00 

Individual Deposits subject to check .... 618,869.13 

Demand Certilicates of Deposit 4,338.48 

Certified Checks 348.30 

Cashier's Checks outstanding 2,143.86 

Total $754,303.98 

State of Massachusetts 

County of • ss. 

I, , Cashier of the above-named bank, do 

solemnly swear that the above statement is true to the 
best of my knowledge and belief. 

, Cashier. 

Subscribed and sworn to before me this day of 

191—. 

^ Notary Public. 

Correct — Attest: 



Directors. 

Of course to an accountant, these statements are 
fairly intelligible as they are published, and 
absolutely so when supplemented by such complete 
details as are returned to the Comptroller of the 
Currency, or to the proper state authorities ; but to 
the average man, they are often meaningless. 



THE SELECTION OF A BANK 21 

It is very difficult for the small investor to 
obtain much information from the examination of 
simply one published report. The best way is to 
systematically cut out and file each statement, and 
then compare these statements from time to time. 
By such a comparison, a business man who is 
acquainted with figures, will notice if a bank is 
growing in the right direction. In short, it does 
not make as much difference in regard to what the 
statement is, as it does whether the statement is 
gradually improving or becoming worse. To illus- 
trate: in the above statement, it does not matter 
whether the surplus and undivided profits amount 
to $27,804.21 or whether it is $5,000 greater or 
smaller; but it makes a great difference whether 
every six months this ^'Undivided Profits" account 
is gradually increased or whether it remains fixed. 
The same rule applies to the '^Banking House" 
account, only in an inverse manner. xV successful 
bank endeavors to cut down this account rather 
than increase it, and a comparison of reports 
quickly shows the investor which his local bank is 
doing. Xinety per cent, of our banks are being 
operated in a most straightforward and conserva- 
tive manner, and there are very few who resort to 
improper methods. Therefore, the main purpose 
of keeping such statements is to notice whether 
the bank is growing and is gradually becoming 
stronger, or whether it is at a standstill or possibly 
falling behind. In selecting a bank in which to 
deposit, the small investor or business man should 



22 BONDS AND STOCKS 

look much further than the report, and should 
always study the following four points: 

(1) The Management 

(2) The Quality of Assets 

(3) The Relation of Deposits to Capital, 

Surplus and Undivided Profits 

(4) The General Opinion of the Com- 

munity 

Interpreting a Bank Statement. 

Management : Every bank, although technically 
a corporation, is practically run the same as any 
business with tw^o or three men really responsible 
for the policy of the institution. The policy of 
many banks is dictated by one man, and in niany 
cases, the banks with a large board of directors are 
run by only two or three of the most active, rather 
than by the entire board. Although the Comp- 
troller of the Currency may object to this method, 
it is about the only method by which many banks 
can be successfully operated. Moreover, it may be 
said that if he were j)resident of a large institution, 
he would dictate its policy in the same efficient 
manner that he now dictates the policy of his 
department, and his associate directors w^ould have 
nothing more to do with running the institution 
than has the average bank director today. In fact, 
the reason that the banking department at Wash- 
ington is run so efficiently is because there is only 
one Comptroller of the Currency instead of seven 
or more. 



THE SELECTIOX OF A BAXIv 23 

It is, however, absolutely necessary that a depos- 
itor should know these two or three men who dictate 
the policy of any bank in which he is interested, 
^loreover, it is absolutely necessary that he should 
select institutions in which these men stand for 
the highest character and judgment. The first 
requisite is absolute honesty, and nothing at all 
questionable should be countenanced in any way. 
Xevertheless honesty alone is not sufficient ; and 
the man who successfully operates a bank must 
have good judgment and wide experience in finan- 
cial affairs. 

Xot only does the safety of a bank in which one 
deposits depend upon the good judgment of the 
man at the helm, but if one of the depositors 
should greatly need money during a period of 
financial stringency, he wishes his bank to be in a 
position that he may be accommodated. If the 
bank is being operated by easy going men who loan 
out money in quantities when it is cheap, then 
trouble comes when these men are unable to give 
further accommodation, as other depositors have 
previously over-borrowed and the bank is in a 
position where it cannot increase its loans. 

Character of Assets: After looking up the 
character of the management, the next thing to 
note is the character of the assets. In reality, the 
average bank statement gives an investor no 
definite information on this point, which is very 
unfortunate. The time may come when all invest- 
ments and loans will be open to the public inspec- 
tion, and when this time comes a great stride will 



24 BONDS AND STOCKS 

have been made in purifying the financial atmos- 
phere. In fact, one of onr recent Presidents who 
has done so much for the welfare of the average 
citizen, could have performed no greater service to 
investors than to have a law enacted which would 
permit an examination by any depositor of the 
investments and loans of the bank in which he 
deposits. This simple law would immediately 
rectify all of the wrongs which for years we have 
been attempting to eliminate by various round- 
about methods. If the loans of a bank were open 
to inspection, this would eliminate the abnormal 
borrowing on the part of any officers or directors ; 
it would prevent borrowers from obtaining money 
under different names; it would prevent banks 
from loaning to men of questionable credit, and it 
would immediately force all banks to clean house 
in order that only good, clean names could be found 
among their assets. But this is not all. Think 
how such a law would eliminate manipulation in 
the stock market ! Such information would im- 
mediately show whether certain Wall Street in- 
terests were ''long" of stocks or ''short" of stocks, 
and would to a large extent, eliminate "wash sales" 
and other deceptive practices now indulged in. 

Moreover, as banks need not accept deposits 
from any one to whom they would not care to have 
their affairs known, such a law should be no hard- 
ship to them. In fact, banks which are in good 
condition are usually willing to show their assets 
to any bona fide inquirer, and any depositor may 
feel free in going to his bank and asking the priv- 



thp: selection of a BANIv 25 

ilege to talk over this matter. Altlioiigii there may 
be exceptions, in most cases the proper oflicer will 
be found willing to show a complete statement of 
the bank's hoklings to any valuable depositor, as 
well as permit him to look over the list of bor- 
rowers. Of course, if sljij bank would not permit 
this, unless there should be some good reason there- 
for, one would be justified in withdrawing his 
account and placing it elsewhere. 

delation of Deposits to Capital, Surplus and 
Undivided Profits: One must refer to the bank's 
statement for this third feature. Aside from the 
reason above suggested, a depositor refers to the 
statement of a bank in order to ascertain how much 
a loss the bank can stand without causing the 
depositors a loss. This margin of safety, so to 
speak, is the capital, multiplied by two, plus the 
surplus and undivided profits. In the case of the 
statement given above, the capital being $50,000, 
the surplus $25,000. and the imdivided profits 
being $2,804.21, this bank could theoretically sus- 
tain a loss of $127,804.21 before causing a loss to 
any depositors. ''Theoretically" because possibly 
all stockholders would not be able to pay the assess- 
ment, and probably all of the assets could not be 
sold at their book value. However, wdth the same 
character of management, a bank which shows the 
greatest margin of safety figured in the above way, 
could naturally be expected to stand the greatest 
percentage of loss, and thus be said to be in the 
strongest position. This means that with the 
deposits the same, the bank with the largest capital, 



26 BONDS AND STOCKS 

surplus and undivided profits is in the strongest 
position from a depositor's point of view. Of 
course, from the stockholder's point of view a 
smaller capital is often more desirable, and the 
stock of banks with relatively smaller capital 
usually sells at higher prices. Here, however, we 
are discussing the analysis of a bank statement 
only from a borrower's point of view, and we are 
not discussing in any way how to determine the 
value of bank stock, which is an entirely different 
proposition. 

Confidence of the Community : Usually, it is a 
bad practice to do what everyone else does, and 
those who make the most money are those who buy 
when all other people are endeavoring to sell, and 
sell when others are buying. This seems to be 
true all along the line; and it was only a little 
while ago that a student of fundamental condi- 
tions said, ''I will give a rule of thumb to follow, 
viz. : buy long term bonds when the largest E'ew 
York banking houses are offering short term notes 
and buy short term notes or else leave your money 
on deposit in the bank when these houses are 
urging the purchase of long term bonds." In 
short, in most instances the feeling of the com- 
munity cannot be depended upon for guidance. 
When selecting a bank, however, one is justified 
in considering the feeling of the community rela- 
tive to an institution, and it is well to associate 
one's self with only such banks as stand well in 
the community, and in which all citizens have 
absolute confidence. 



THE SELECTION OF A BANK 27 

Ir* addition to obtaining information on this 
subject from common gossip, the bank statement 
also shoAvs the feeling of the community in two 
distinct ways, viz.: (1) The statements show 
whether the deposits are gradually increasing and 
have continued to increase over a long term of 
years, or have reached a standstill, or are declin- 
ing. Any bank which does not make any special 
inducements, but offers the same terms as other 
banks, and continues to gain in deposits, usually 
has the full confidence of the community. There 
is, however, another method of judging the con- 
fidence of the community besides studying the 
report ; that is, whether or not the stock sells at a 
price approximately equal to its book value as 
sho"^\Ti on the statement. In the above statement, 
as the sum of the capital, surplus and undivided 
profits is $77,804.21 or about 156% of the capital, 
this shows that the book value of the stock is 
approximately $15G. per share and in the case in 
question the stock sells at approximately this 
figure. There is, however, another institution 
where the capital is $200,000 and the surplus and 
undivided profits $100,000, and the stock sells for 
only $110. per share. This clearly shows that in 
the latter case, the institution has not the con- 
fidence of the community, for if the community 
believed that tlie statement were correct, none of 
this stock could be purchased at $110. per share. 
Therefore, when picking out a bank in which to 
deposit, it is well to obtain from the officers the 
bid price of the stock and compare this price with 
the book value. 



28 BONDS AND STOCKS 

It is apparent that tliere are in this country 
over 100,000 clerks directly in the employ of 
banks which receive money on deposit; if stock 
exchange firms, bond houses and allied institutions 
are included, there must be about 250,000 em- 
ployees who are indirectly dependent upon general 
banking. This means that over 1,000,000 people 
in this country are dependent for their livelihood 
upon the good-will of our nation's 10,000,000 bank 
depositors. An appeal to the depositors to give 
more business to the banks, may well be supple- 
mented by an appeal to these one million people, 
whose living depends thereon, to give these small 
depositors a square deal. 

Small Depositors are Entitled 
to Encouragement. 

A young man who belongs to one of the very 
best families in an eastern town, who is a graduate 
of Harvard University and has all of the ^^ear 
marks'' of a young man of character, education 
and accomplishments, wdien first visiting one of 
our western cities, found it absolutely impossible 
to find a large institution which would permit him 
to open a small checking account. After visiting 
several large institutions, he was obliged to give his 
account to a small new bank which had only recent- 
ly started. 

This small new bank may some day be as large 
and influential as any, but it would seem that the 
larger institutions in that city are following a very 
short sighted policy. Of course there is no reason 



THE SELECTIOX OF A BAXIv 29 

why a bank should take every account that is 
brought to it, as doubtless there are many men 
who would take advantage of a bank by over-draw- 
ing their account, and resort to other illegitimate 
practices. But for a bank to refuse a depositor 
simply because they do not already know him is a 
great mistake. When a young man brings an 
account to a bank, if the bank docs not know the 
young man and if he is not properly introduced, it 
should tahe pains to look up the young man, and if 
of good character, give him checking facilities. Of 
course many bankers will reply, ^'We are perfectly 
willing that any young man should open a savings 
account ; but we cannot afford to let him draw 
checks unless Ave know him and his balance is 
attractive." When a young man desires to draw 
checks and at the same time expects interest — even 
at so low^ a rate as two per cent. — a bank is justified 
in refusing his interest ; but it should not refuse 
him the accommodation of a checking account, as 
it should encourage the use of checks in every 
possible way. It is all right for a bank to spend 
money on newspaper advertisements, calendars, 
and other souvenirs ; but it had much better spend 
this money in encouraging young men to open 
checking accounts and acquire the "banking 
habit." 

Although banks encourage the starting of small 
savings accounts when they will not encourage small 
checking accounts, yet the average bank employee 
has much to learn regarding how to treat small 
savings depositors. The tv\^o things most dreaded 



30 BONDS AND STOCKS 

by a boy are visits to the dentist and the local 
savings bank. He is often abruptly treated and 
visits the savings bank with fear and tremblings 
to deposit a few dollars. Although this may be a 
little overdrawn, yet probably most men have had 
the same impleasant feelings during their early 
banking experience. Most of the large city sav- 
ings banks would greatly increase their efficiency 
and usefulness if their clerks should be taught 
courtesy and gentleness, as are the clerks of a 
mercantile store which is subject to real competi- 
tion. 

An illustration shows this condition well. A 
young man visited a large Boston savings bank on 
an errand in connection with the bank account of 
one of his employees. While waiting his turn at 
the window, he w^as astonished at the abrupt 
manner of treatment which was shown to small 
depositors of that great institution. Instead of 
speaking a word of encouragement to these poor 
people who were turning in savings that repre- 
sented to them weeks and months of labor, they 
actually were not treated with common decency. 
Although many believe that there is no need of 
postal savings banks if our present banks would 
arise to their opportunities, yet if they could stand 
in line at some large savings bank, they would 
readily understand why the people demand some- 
thing different than exists to-day. Of course, this 
does not apply to all banks, for many of the 
younger and smaller institutions have an atmos- 



THE SELECTION OF A B.\XIv 31 

phere of cordiality and hospitality; but this does 
apply to a very large number of institutions. 

Therefore, the men who are in any way con- 
nected with our nation's great banking system 
should remember that your business can be 
increased and developed by a pleasant word and a 
cheerful smile just the same as the business of any 
store located in your city. It may be true that a 
certain nimiber of people must do business with 
you however you treat them; but it is also true 
that the deposits of your institution would be much 
larger, and the number of depositors greater, if 
you strove harder to be of service to them in every 
legitimate way possible. 

Banks Should Advise Regarding 
Investments. 

Two ways of soliciting accounts by the banks are 
here given; (1) by giving good checking facilities 
and (2) by seeing that their institution is in a 
position to give financial advice to any depositor 
requesting the same. Here is the great difference 
between the large foreign institutions and our own 
American banks. The great banks of France, 
Germany and other older countries serve both of 
these functions. They act as a place for the 
accumulation of savings ; but in addition, they aid 
the depositors in the investing of these savings. 

In the case of the real French savings bank, after 
about $1500 has been deposited, the bank ofiicials 
are required by law to purchase a $100 bond for 
every additional $100 deposited, and to place said 



32 BONDS AND STOCKS 

bond in an envelope and mark it tlie property of 
said depositor. In other words, the Erench peasant 
can continually bring money to certain French 
banks, and he will always have about $1500 on 
deposit and the balance in bonds which have been 
purchased for him by the ablest Erench financiers, 
which bonds are his own property, and are being 
held strictly for him. Other foreign banks do not 
use this method, but systematically make offerings 
of securities every week for the express benefit of 
depositors who are ready to make outside invest- 
ments. In addition to advertising these offerings, 
the manager of each bank examines his depositor's 
accounts and sends special letters recommending 
the purchase of the bonds to all depositors whose 
accounts have reached a certain size. In other 
words, they ^^treat every depositor as they would 
the depositors should treat them," striving simply 
to serve the best interests of the depositors believ- 
ing that eventually this policy will react to the 
benefit of the institution. 

When the 'Ne^Y York, I^ew Haven & Hartford 
Kailroad Company's $100 bonds were being offered 
to French investors to yield nearly five per cent, 
every bank throughout France interested in this 
syndicate had a large placard of about 30 x 20 
inches, w^ith the advertisement printed thereon 
pasted on its plate glass windows and hung by the 
receiving windows. How different this method 
was from the method employed by the American 
banks. For instance, when 'New Haven bonds are 
offered in this country, they are first made only w 



THE SELECTION OF A BANIv 33 

denominations of $1000, which is beyond the reach 
of an ordinary man ; and then only a few offerings, 
marked ^^confidential/' are mailed to the various 
larger banks telling about the issue. In fact, every 
effort is made in this country to sell the issue before 
making any public announcement which can be 
seen by the small investor. The result of this is 
that when the issue is finally advertised in the daily 
papers, and it is stated that "the subscription books 
will be open this morning at 10 o'clock and remain 
open for three days," a reading notice is found 
among the financial items stating that the "bonds 
have been over-subscribed and the subscription 
books were closed immediately after opening," 
which means that the small investor who desires to 
purchase a thousand dollar bond must pay three 
profits, viz. : — the underwriter's commission, the 
banker's commission, and in addition a profit to the 
speculators and various other "friends" who pur- 
chased the bonds at private sale just before the 
opening of the subscription books. 

xv'ow there is no doubt but that American bank- 
ers know their business and need no suggestions 
from outsiders who are interested simply in the 
small investors, but if Mr. Mellen had issued his 
bonds in denominations of $100 and had hung 
placards, offering these bonds for sale, near the 
ticket windows of 350 of his ticket offices o in the 
windows of 350 banks along the line of his rail- 
road, the bonds would have been sold as quickly as 
was the case by posting these same placards on the 
windows of 350 banks in France. 



34 BONDS AND STOCKS 

In other words, there is a great opportunity for 
the banks of this country to take the small investors 
into their confidence and have them learn that the 
banks are truly interested in their welfare, in the 
same way that the French peasants believe their 
banks to be interested in them. Probably the 
American banks feel that if they recommended and 
sold investments, the money used to pay for the 
same would be withdrawn from their institutions ; 
but will it not be withdrawn eventually anyway? 
Is it not much better to sell depositors something 
which is sound (and in addition to receiving a 
profit thereon, to prevent said depositors from mak- 
ing unnecessary losses) than to have them use the 
money to buy some worthless mining, oil or real 
estate stocks ? Moreover, in refusing to give more 
study to the subject of investments and business 
conditions in general, many American banks are 
offending not only the small investors, but the large 
investors as well. 

How Many Depositors are Offended. 

For instance, a large bond holder recently 
received a check of several million dollars from one 
of the largest steel corporations for ore lands which 
he owned. This man had simply been the owner 
of land all his life, and although one of the best 
informed men in America on iron ore properties, 
he knew absolutely nothing regarding stocks and 
bonds. Therefore, upon receipt of this check he 
literally did not know what to do with it, except to 
divide it among a half-dozen of the largest banks in 



THE SELECTION OF A BANK 35 

his city pending further investment. To hear the 
man relate his experiences with these banks would 
truly make a story in itself, but the upshot of the 
matter is as follows : 

Being largely a student by natu.re, he determined 
to study investments and fundamental business 
conditions in the same systematic manner as he 
had previously studied geology and chemistry ; and 
he started out by visiting these banks and asking 
the opinion of their officers as to what they would 
advise for investment. Without exception, as this 
man relates his story, these banks absolutely 
refused to give him any concrete information what- 
ever. Of course, being such a large depositor, 
they treated him with profound respect, inviting 
him into their private offices, and in some instances 
the cashier invited him to lunch in order ^^to talk 
over the matter ;" but these bank officials absolutely 
refused to commit themselves in any way. When 
relating this story, the man was so indignant that 
he insisted that these bank officials either were too 
ignorant to be operating the institutions, or else 
they refused him information fearing that, if they 
advised the purchase of any securities, he would 
withdraw the money from their banks in order to 
purchase said securities. At least, he interpreted 
their talk in the latter way and, although he did 
not buy any securities at that time, he withdrew 
the money from all of these local banks, and depos- 
ited it in some large Chicago banks with the officers 
of which he had no personal acquaintance whatso- 
ever. 



36 BONDS AND STOCI^S 

'Now, if one of these local banks in which this 
man had first deposited the money, had striven to 
truly help him in the investment thereof instead of 
losing his deposits, this wealthy man would have 
become a most valuable asset for the institution, as 
the income account alone of a man with millions 
of dollars in personal property is greatly to be 
envied by any commercial bank. All of these 
banks, however, utterly failed in their purpose. 

This man succeeded in obtaining real informa- 
tion only when he came in touch with a large bond 
house of national reputation with offices in 
Chicago. Here he found an employee, who, as a 
last resort, told him of an instruction course which 
is operated for the benefit of bond salesmen and 
investors, and although this man is now over sixty 
years old, he studied this course with the same 
energy and seriousness as is being exhibited by the 
young college graduates who are just entering the 
bond or investment business. Sufficient it is to 
say, that although this man still has his money in 
banks on deposit, yet he some day will invest it; 
and when he does, this bond salesman who, instead 
of trying to ^^land him" v/ith some securities in 
which he could make a good profit, was willing to 
give him the help he desired, will some day have 
a most valuable customer. 

It is, therefore, evident that the men employed 
by our nation's financial institutions should be 
more courteous and more affable, and should also 
study financial matters, thus becoming posted on 
mercantile, monetary and investment conditions. 



THE SELECTION OF A BANI^ 37 

He should stizdj fundamental subjects such as 
failures, foreign trade, immigration, gold move- 
ments and learn how these subjects affect the busi- 
ness of his depositors. He should keep in touch 
with the nation's crops, its mining and manufac- 
turing industries in order to be of aid to the mer- 
chants of his town, and show them the parts of the 
country in which they should contract their selling 
efforts and where they should push out for more 
business. He should study the ]^ew York Bank 
Statement and the Comptroller's Reports and learn 
how to anticipate changes in money rates in order 
to be of service to his borrowers, showing them 
when to expand or extend their credits, and when 
to pay up their loans and harbor their reserves. 
He should remember that he is something besides 
a mechanical cash register, to stand up to the 
window like a machine and receive and pass out 
money ; rather remember that he has a great func- 
tion to perform in the community, the function of 
guiding his depositors in their fundamental mer- 
cantile, monetary and investment policies. 

The Two Main Functions of Banking. 

A word to the officers and directors of the thirty 
thousand banks: Banks have two distinct func- 
tions; (1) Aiding in the creation and operation of 
transportation, industrial and commercial enter- 
prises by providing the capital therefor. (2) 
Regulating the number and growth of such enter- 
prises by conscientiously increasing or contracting 
this supply of capital. 



38 BONDS AND STOCKS 

The first function is performed by collecting 
money from a large number of people, known as 
"depositors/' and loaning tlie same for definite 
periods by purchasing therewith commercial paper 
and other securities such as most depositors would 
be unable to do independently. The second func- 
tion is performed by varying the amount of cash 
and securities held ; for instance, during periods of 
panic or depression, when most individuals with- 
draw money from useful channels and withhold 
cash, it is a bank's duty to give out all cash possible 
by purchasing such good commercial paper and 
high grade securities as are selling below their true 
value. On the other hand, during periods of great 
prosperity, it is a conservative bank's duty to dis- 
pose of a large portion of this commercial paper 
and these other securities, storing up large cash 
reserves pending the next period of money strin- 
gency and panic conditions. 

In this way such banks not only perform a great 
service, both to depositors and borrowers by com- 
bining small sums and loaning them in safe and 
profitable channels, but also act as great regulators 
and "storage basins" for the entire business com- 
munity. Such banks store cash during periods of 
great prosperity, when the public is willing to loan 
anybody and buy anything, and then give out such 
cash during periods of depression when the public 
refuses to loan solvent borrowers or to purchase 
even the highest grade securities. Moreover, for 
performing these two functions, such banks receive 
a two-fold reward; namely, the market rate of 



THE SELECTION OF A BAKK 39 

interest di the loans and securities held, and also 
every few years a large profit on the 'purchase and 
sale of money, so to speak. Moreover, banks which 
do not fulfill these two functions not only fail to 
fully serve their true purpose in the community, 
but also make very much smaller profits and 
assume much greater risks. 

Many banks have heretofore failed to perform 
this second function owing to their inability to 
obtain the necessary statistics for correctly judging 
the trend of conditions ; but any bank can readily 
obtain such statistics if its officers will take the 
trouble. 

When selecting a bank in which to deposit, the 
small investor should select such institutions as are 
operated by men best combining highest character 
and soundest judgment. In other words, the small 
investor should associate himself with the banks 
which stand for righteousness and conservatism, 
and yet encourage the small depositor as well as 
the large, banks whose ofiicers study investment 
securities and are willing to give out their knowl- 
edge to help others ; and above all whose officers are 
students of underlying business conditions and are 
guiding their institutions with the above men- 
tioned two-fold purposes in view. In short, look 
well to the character and general fitness of the men 
who actually control the institutions insisting: on 
the highest standard of honesty, morality, judg- 
ment and broad-mindedness. 



CHAPTER III. 

SUGGESTIONS FOR INVESTORS. 

Fundamental Principles. 

THREE fundamental principles whicL. have 
served as tlie foundation for the building 
of America's greatest fortunes may be 
emphasized here, but before discussing these, the 
four distinct forms of ^'investing" which exist in 
every community today should be understood. 

To Which Class Do Yon Belong? 

(1) Those tuho buy stocks on a margin to-day 
ivith the idea of selling them again within a few 
days at a 'profit. Why these men buy and why 
they sell is beyond human knowledge. They know 
very little about the properties; they know prac- 
tically nothing about the technical condition of the 
market ; and they are absolutely void of any knowl- 
edge of fundamental conditions. In most cases, 
they simply have sort of a mania for trading in 
stocks, and consequently buy and sell practically 
with their eyes shut and depending solely upon 
chance. All of these men can be classified as 
gamblers, although this class includes a very large 
number of people. Suificient it is to say that, 
generally speaking, not a person has ever followed 
this trading for any length of time and made 
money; while the names of hundreds can be 
obtained whom such a habit has ruined financially, 
physically and morally. 



SUGGESTIOXS FOR IXVESTORS 41 

(2) To go a step furtlier in the sifting, we 
come to the men iclio buy stocJcs today ivith the 
idea of selling them a month or so hence. These 
men are nsually intelligent and men of means. 
They do not give much attention to the study of 
separate properties ; but they do consider carefully 
the technical condition of the market, and endeavor 
by a study of the transactions of the !N'ew York 
Stock Exchange, as shown by the tape each day, 
to ascertain what the ^^insiders" are endeavoring 
to do, and whether or not the market is over-sold or 
over-bought or in statu-quo. Although these men 
often lose, they nevertheless have a distinct advan- 
tage over the ordinary traders of the class above 
mentioned, and cannot be technically called gam- 
blers; but rather constitute a class of intelligent 
speculators. Although it is not to be recommended 
that anyone attempt to join this class, as the risks 
are far too great, yet some of these men perform a 
function in steadying conditions, and are entitled 
to as much respect as the speculator in real estate 
or some commodity. 

(3) Another sifting brings us to the third 
grade, namely: the men luho buy outright high- 
grade securities, mainly for their interest yield, 
hut also for a profit on their sales. These are the 
men who went into the market in 1903, purchas- 
ing large quantities of securities, and who held 
these securities for about three years, when they 
sold out at a very large profit. Upon liquidating 
in 1906, these men deposited a part of the money 
in banks ; but invested largely in commercial paper 



42 BONDS AND STOCKS 

and in short term notes maturing in one or two 
years. Then in the winter of 1907-8, they again 
purchased outright, at an average decline in price 
of about 40%, the same high-grade securities which 
they sold in 1906. These securities they held 
through 1908-9 until the early part of 1910, when 
they again sold them at a huge profit and again 
invested the money in short term notes and com- 
mercial paper. There is no great secret in this 
method of investing, but it cannot be practised 
successfully unless one is willing to study the sub- 
ject of investments. 

As an illustration of how these men have safely 
acquired great fortunes, it is only necessary to say 
that $2,500 invested about fifty years ago, in 
the ten most conservative stocks of that day such 
as Lackawanna, Illinois Central, ^ew York 
Central, etc., (which, moreover, were then selling 
almost as high as in 1907), would now amount to 
$1,500,000, if said stocks had been bought and 
sold in accordance with the above. Said investor 
could also have confined his investments strictly to 
ten high-grade securities — without borrowing or 
buying on margin — and moreover would have 
bought and sold only eight times, making a total 
of only sixteen transactions with an average of 
about three years apart. 

Moreover, if this illustration were based on high- 
est and lowest prices, or if intermediate move- 
ments were considered, or if less conservative 
stocks were purchased, the result might be made 
much larger. Our illustration eliminates all risk, 



SUGGESTIONS FOR INVESTORS 43 

chance and extraordinary conditions, and shows 
only what any person in this third class with 
$2,500 can, without any risk, accumulate in a 
comparatively few years, by simply studying 
fundamental conditions. 

The men of this class comprise the successful 
and bona fide investors of the world to-day, and 
may be found in all the large centers of this 
country, as well as in London, Paris, Amsterdam, 
Frankfort and other cities. These are the men 
who buy outright the highest grade securities, and 
who know when to buy and when to sell by a study 
of fundamental conditions. 

(4) One, however, must walk before running 
and creep before walking, and therefore there is a 
fourth class who likewise buy outright only high- 
grade securities, hut who buy them simply for 
permanent investment. These are the people who 
give no thought to the study of fundamental con- 
ditions, and are interested simply in obtaining as 
large an annual net income as possible and at the 
same time protecting their principal. This class 
consumes the output of large issues of inactive 
bonds which are continually being placed on the 
market. It is this class which the salesman of the 
modern bond house seeks to interest in his wares. 
It is this class which furnishes the great financial 
strength to the industries of our nation, carrying 
as they do the hugh funded debt of our govern- 
ment, our municipalities, our railroads and indus- 
trial corporations. 

Nevertheless this class cannot correctly be 



44 BONDS AND STOCKS 

termed "investors" unless the term is qualified by 
the word "permanent." They are technically 
simply the savers of money, keeping it in hand till 
their pocket-books are full, then depositing it in a 
bank and buying securities with the surplus. 
Although we all should hope to some day be 
counted among the investors of the third class 
above mentioned, yet we must first belong to this 
fourth class, as the saving of money and the acquir- 
ing of a small capital is the first requisite of suc- 
cess. 

Buy Only The Best Securities. 

The first principle which those who aspire to be 
investors should remember is that all purchases 
should be confined absolutely to safe investments. 
In a talk with a 'New York bank man who is con- 
nected with one of the largest trust companies and 
is in a position to know the results attained on all 
classes of investments, he said that is was absolutely 
impossible for a permanent investor to obtain with 
safety over a long period of years, more than five 
per cent interest. He stated that a number of funds 
passed through his hands; some were invested in 
speculative mining stocks, paying from ten to 
twenty per cent per annum; other funds were in- 
vested in industrial stocks, paying from seven to 
twelve per cent per annum; other funds were 
invested in bonds of new companies, paying around 
six per cent per annum; and other funds invested 
in seasoned bonds of established companies, paying 
from four to five per cent per annum. Then he 
remarked that the final net income of all of these 



SUGGESTIONS FOR INVESTORS 45 

funds was practically the same, namely : about 
four and one-half per cent. This is because the 
losses on the principal, in the cases of the funds 
invested in high dividend-paying stocJcs, ivere 
sufficient to bring down the average income to the 
above mentioned four and one-half per cent. In 
other words, the loss on the principal seemed to 
directly increase with the income, and it seemed to 
be almost an impossibility to beat the law of aver- 
ages, when a number of securities are considered. 
The investor, therefore, who can buy only a few 
securities, and who cannot rely on this great law of 
averages should therefore eliminate all these stocks 
which pay large interest rates, all unseasoned secu- 
rities, and in fact, everything except the best. 

It can be frankly stated that the best invest- 
ments for the small investors are straight mimici- 
pal bonds of established cities, and bonds or notes 
of our established railroads and public service cor- 
porations. Eemember that the best are none too 
good, and that it is absolutely impossible for the 
permanent investor to obtain with perfect safety 
more than four and one-half per cent or, with a 
satisfactory degree of safety, more than five per 
cent over a long period of time. However, these 
rates are in excess of what banks pay, and there- 
fore one should be contented with such a yield. 

Buy Only Outright and Avoid 
Margin Purchases. 

The second principle which the investor should 
thoroughly believe is the fact that it is very unwise 
to buy on a margin, or in fact, to borrow to make 



46 BONDS AND STOCKS 

a purchase of securities. Of course, it is very easy 
to select instances where men have made money by 
borrowing, in order to buy more securities than 
they could pay for; but for every such case, ten 
instances can be cited where the purchaser would 
have been better off not to have borrowed the 
money. 

There are tricks to every trade, and there is no 
easy way to beat a man at his own game. There- 
fore, just remember when urged to buy more than 
you can pay for, that probably someone is trying 
to unload. Moreover, the small investor ought to 
remember always that he is simply a permanent 
investor, who does not borrow money with which 
to buy. If one is buying simply as a permanent 
investment, for the income to be derived, he need 
not borrow the money to take advantage of pres- 
ent offerings. There is usually always a sufficient 
supply of bonds. In answer to a remark about 
the unfortunate state of affairs caused by crop 
failures, one of the keenest old-school bond men of 
this country, a partner in a Cincinnati municipal 
bond house, said, "Da ist ein crop dat neber gibs 
out, und dat ist die bond crop." 

The man with a clean character, good health, and 
with no notes outstanding is in an impregnable 
position; but as soon as he begins to borrow, 
whether to carry on mercantile business or to build 
houses or buy securities, his troubles begin and 
somebody has a "rope around his neck." There- 
fore, the second fundamental principle needed to 



SUGGESTIONS FOR INVESTORS 47 

create a fortune is to keep always the position of 
the creditor, and never get into the position of the 
borrower. 

Buy Whenever You Have The Money. 

Until the investor has accumulated a sufficient 
amount of money and training, and is able to spend 
a reasonable amount of time and money in study, 
it is unwise for him to give much attention to price 
movements. Many men, inexperienced in the in- 
vestment of money, follow the quotations until they 
see by the daily papers that a panic exists, that 
banks are closing, great corporations failing and 
stocks very low, believing that at such a time they 
will heavily invest. Others believe that it is a 
simple matter to buy securities to-day and hold 
them until their country is bounding in great pros- 
perity, with tremendous crops, tremendous railroad 
earnings and general booming trade throughout the 
land, when they will sell these stocks. 

Theoretically this is very good; but practically 
all investors of the fourth class who are waiting for 
this panic to come before purchasing, would be 
among the most panic stricken when the time 
arrives, and would be unwilling to buy United 
States government bonds at fifty cents on the dollar 
if they had the opportunity. Moreover, when the 
period of prosperity comes, during which time they 
expect to liquidate, they wdll feel that there is a 
still greater period of prosperity coming and, in- 
stead of selling, they will probably buy more secu- 
rities at that time. In other words, for anyone who 



48 BONDS AND STOCIiS 

is not fortified by a personal knowledge of the 
exact fundamental conditions, to take advantage of 
these great price movements is almost an impos- 
sibility. As to the reason for this, one mnst refer 
to psychologists for an answer. !N'ot only are the 
psychological laws against such uninformed men, 
but all our training and hereditary instinct causes 
us to follow instead of to lead. It is almost as 
difficult for the untrained man to buy stocks when 
everyone else is selling, as it was to be a Christian 
in the days of l^ero. In our dress, our food, our 
mode of travel, our sports, and in all our habits, we 
are almost forced to follow the customs as did our 
father, grandfathers and other ancestors for scores 
of generations back. Therefore, whatever one's 
resolves may be — unless fortified by a definite, con- 
stant study of fundamental conditions — he will be 
found buying when everyone else is buying, name- 
ly : at the very top, and selling when everyone else 
is selling, namely : at the very bottom. 

The only safe method for the investor with two 
or three thousand dollars is to ignore price move- 
ments, and simply invest in the outright purchase 
of some good seasoned bond whenever he has idle 
money, and if possible at regular intervals. There 
is no use trying to overcome in a few years a trait 
which has been inherited from tv/enty generations. 
Besides, those who invest in this way at regular 
intervals obtain their securities at fair average 
prices in the long run. Sometimes such persons 
buy securities when they are high and otjier times 
when they are cheap ; but in the long run, it aver- 
ages up very well. 



SUGGESTIOXS FOE, INVESTORS 49 

One more fact on this point is that these unin- 
formed investors are always equally divided as to 
whether prices are high or low. That is, when 
fundamental conditions show plainly that securities 
should be either bought or sold, the small investors 
are equally divided in their own mind, about one- 
half of them itching to buy something and about 
one-half itching to sell something. 

Conclusion. 

The French peasants best illustrate this fourth 
class and it is due to them that France is so very 
strong financially today. The French people do 
not trade in stocks as do the Americans, and they 
very much dislike our gambling spirit. They are 
very thrifty and although they will not borrow to 
buy — yet they always buy a bond as soon as they 
save one hundred dollars. 

An hour spent in the Safe Deposit Vaults of the 
Credit Lyonnaise in Paris, which is probably the 
largest of its class in the world, gives an excellent 
opportunity of iningling with the people and 
affords a most impressive sight. Once in a while 
a person of apparent wealth comes in ; but most of 
them are apparently in very humble circumstances. 

There are scores of men in their overalls, and 
market women with shawls tied about their heads, 
and even the street sweepers have their boxes with 
one or more bonds. One instance is known where 
a man actually stood his broom up by the side of 
the table as he cut the coupons from some Russian 
bonds he owned. 



50 BONDS AND STOCKS 

It is of course impossible to give a separate room 
for the use of each person when cutting off these 
coupons, as is done in this country. The rooms 
are large with large tables in the centre, each table 
being divided into ten or more little compartments 
like the tables used by telegraph operators ; but 
this makes the sight even more impressive. 

This shows at a glance why France is able to 
absorb our surplus issues provided they are abso- 
lutely good, and in one hundred dollar denomina- 
tion in order that they may invest as fast as they 
save the money. Bonds of the Pennsylvania R. K. 
Co. and of the !N'ew York, 'New Haven & Hartford 
R. R. Co. are very atractive to the French peasants 
now, as they may be bought over there in denomi- 
nation of one hundred dollars. In fact, not only 
are the French ideal savers, but they very closely 
follow the three rules suggested above, namely : 

(1) Buy only the best seasoned securities, 
preferably municipals and underlying corporation 
bonds. 

(2) Buy only outright and avoid all margin 
purchases. 

(3) Buy at regular intervals whenever having 
the money. 

Some may think that this is over-conservative 
advice, and it may not be according to the reader's 
liking; but experience has shown this to be well 
founded. There are many, however, who are 
anxious to get into class three and take advantage 
of the long, broad price movements ; but one should 
prepare a good foundation before erecting a high 



SUGGESTIONS FOR INVESTORS 51 

building. There is no rojal road to wealth. 
Everyone must enter and graduate from the pre- 
paratory school and first acquire, through hard 
work, study and systematic saving, a necessary 
amount of capital and experience. Moreover, in 
order to acquire his first capital and experience, so 
as to erect his fortune, he must build the founda- 
tion on these three fundamental principles herein 
emphasized, following the French peasant as close- 
ly as possible. 

In fact, if there were a way of always knowing 
what these peasants are buying it would be a very 
good rule for Americans to do likewise. Of course, 
the fact that a stock is listed in Paris or bonds are 
''being offered abroad," is no reason that the 
French will be tempted thereby, as such a listing 
in Paris may be simply for the purpose of interest- 
ing Americans on this side. When, however, one 
knows tliat some issues like the Pennsylvania K. K. 
or the Baltimore & Ohio R. R. are actually being 
purchased by these French peasants, Aniericans 
can make no mistake in placing their savings in the 
same securities. At first thought this seems a 
curious statement to make; but we go to Paris to 
study art, and to Germany to study medicine and 
to Italy to study music. Therefore, why not learn 
the art of the saving and the permanent investing 
of money from the French, since they are the 
world's greatest exponents of the three fundamental 
principles herein mentioned. 



CHAPTER IV. 

THE INVESTOR'S VOCABULARY. 

Ten Words, The Meanings Of Wliicli Should 

Be Thoroughly Understood By 

Every Investor. 

WHEI^EVER a large bond issue is public- 
ly offered for sale in the leading news- 
papers and magazines, brokers are 
always asked certain questions relative to the 
meaning of various phrases used in their advertise- 
ments. A large number of advertisements of 
leading issues have been accumulated, and the 
various phrases assorted in order to select those 
most generally used (although commonly misun- 
derstood) by many investors. The result of this 
work has been the selection of ten phrases which in 
a way explain ten characteristics of bond issues^ all 
of which are herewith briefly described. 

The bond houses, when preparing advertisements, 
should give more attention to the small investor and 
prepare the copy of their advertisements with him 
more in mind. It is true that these advertisements 
are readily comprehended by the trained banker 
and large investor ; but many of them are almost 
incomprehensible to the investor who is unac- 
quainted with the technical phrases and terms em- 
ployed. As the great need to-day of our corpora- 
tions and bankers is to extend the market for bonds 
among the small investors, it is especially desirable 



TPIE IXVESTOR'S VOCABULARY 53 

that this suggestion be given most careful attention 
at this time. 

The Principal of a Bond. 

All bonds are divided into two main divisions, 
namely, coupon bonds and registered bonds. A 
coupon bond consists of two parts, the principal and 
the coupons. Usually it is made up of two sheets 
of paper bound together, one sheet containing the 
note or written obligation which represents the 
principal, and the other sheet is made up of cou- 
pons. A registered bond, moreover, is simply the 
above described without the coupons; that is, a 
registered bond consists of the sheet for the prin- 
cipal, so to speak, which in such a case is known as 
a certificate. 

The "Principal" of a bond is in reality a "prom- 
ise to pay," and corresponds with the note which a 
man gives with a mortgage. This note usually is 
for $1,000 and mentions that the security of this 
note and a certain number of similar notes, amount- 
ing in the aggregate to so many thousand dollars, 
has been secured by a mortgage on a certain prop- 
erty to a certain trust company as trustee. 

The theory of the principal of a bond, so to speak, 
is that if one should cut off the coupons from a 
bond due April 1, 1934, and then lose the "princi- 
pal" — that is, the certificate containing the note — 
the finder of this principal could collect no interest, 
and in fact could do nothing with said "principal" 
until April 1, 1934, when he could collect $1,000. 



54 BONDS AND STOCKS 

The following is a copy of the principal appearing 
on the first sheet of a well known railway bond. 

Copy of The ^^Face" of a Bond. 

THE --^ ^EAILWAY COMPANY 

'Noo Pirst and Eefunding Mortgage Gold 'No. 

Bond Interest Four Per Cent 

Per Annum, 

The E;ailway Company, hereinafter 

called the ^'Railway Company/' for value received, 
hereby promises to pay the bearer, or if registered, 
to the registered holder of this bond, the sum of 
ONE THOUSAND DOLLARS in gold coin of 
the United States of America, or equal to the pres- 
ent standard of weight and fineness, on the first 
day of April in the year. One Thousand Nine 
Hundred and Thirty-four, at its ofiice or agency in 
the city of New York, and to pay interest thereon, 
from the first day of April, A. D. 1904, at the rate 
of four per cent, per annum, payable semi-annually 
at said ofiice or agency in like gold coin on the first 
day of April and October in each year until the 
payment of said principal sum and until the pres- 
entation and surrender of the interest coupons here- 
to annexed as they severally mature. Both the 
principal and the interest of this bond are payable 
without deduction for any tax or taxes which the 
Railway Company may be required to pay or to 
retain therefrom under any present or future law 
of the United States of America, or of any state, 
county or municipality therein, the payment of 
which tax or taxes the Railway Company hereby 



THE INVESTOR'S VOCAEULARY 55 

assumes. This loan is one of a series of coupon 
bonds and registered bonds known as ^ 'First and 
Refunding Mortgage Gold Bonds" of the Railway 
Company, authorized to be issued to an amount not 
exceeding in the aggregate, the principal sum of 
One hundred and sixty-three million dollars at any 
one time outstanding. 

All of said bonds have been or are to be issued, 
and are or are to be equally secured by a mortgage 
and deed of trust dated April 1st, A. D. 1904, 

executed by the Railway Company to the 

Trust Company of isTew York and 

of . ." , as Trustee, to which mortgage 

and deed of trust, reference is made for description 
of the properties and franchises mortgaged and 
pledged in the nature and extent of the security, 
and the rights of the holders of said bonds under 
the same, and the terms and conditions upon w^hich 
said bonds are issued and secured. This bond shall 
pass by delivery unless registered in the owner's 
name in the books of the Railway Company, such 
registry being noted on the bond by the Railway 
Company. After such registration no transfer 
shall be valid unless made in such books, and by 
the registered holder in person, or "by his attorney 
duly authorized in writing, and similarly noted on 
the bond, but the same may be discharged from 
registry by being in like manner transferred to 
bearer, after which it shall be transferable by 
delivery, but this bond may again, from time to 
time, be registered or transferred as before. Such 
registration, however, shall not effect the nego- 



56 BONDS AND STOCKS 

liability of the couponSj but shall continue to be 
transferable by delivery. The holder thereof, at 
his option, may surrender this bond, with all un- 
matured coupons attached, for collection and ex- 
change, for a registered bond without coupons, and 
such registered bond may hereafter be re-exchanged 
for a coupon bond as provided in said mortgage 
and deed. The coupon bonds are numbered con- 
secutively from 1 to. . . .inclusive of the coupon 
bonds, so numbered that there shall always remain 
unissued an aggregate face amount equal to the 
aggregate face amount of the outstanding regis- 
tered bonds of this issue. Each registered bond 
shall have endorsed thereon the serial number or 
numbers of coupon bonds remaining unissued on 
account of such registered bond, and on surrender 
of any registered bond for cancellation and ex- 
change for a coupon bond or bonds, the coupon 
bond or bonds issued in exchange therefor shall 
bear the serial number or numbers so endorsed on 
the registered bond. The bonds of this issue are 
subject to redemption at the option of the Railway 
Company at 105 and accrued interest on or at any 
time prior to April 1, 191 — , on six days' previous 
notice as provided in said mortgage and deed of 
trust. 'No recourse shall be had for the payment 
of the principal or interest of this bond, or for any 
claim based thereon or in respect thereof or of said 
mortgage and deed of trust, against any stock 
holder, officer, or director of the Railway Company, 
either directly or through the Railway Company, 
whether by virtue of any statute or by enforcement 



THE IXVESTOR'S VOCABULARY 57 

of an J assessment or penalty or otlierwise. This 
bond shall not become valid or obligatory for any 
purpose until it shall have been authenticated by 
the certificate hereon endorsed by the Trust Com- 
pany at the time of the Trustees imder said mort- 
gage and deed of trust. 

In ^Vltness Whereof^ the Railway Company has 
caused these presents to be signed by its President 
or Vice-President, and its corjoorate seal to be here- 
to affixed, attested by its Secretary or an Assistant 
Secretary, and coupons for said interest with the 
engraved signature of its Treasurer or an Assistant 
Treasurer to be hereunto attached, as of the first 
day of April A. D. 1904. 

THE RAILWAY COMPANY 

by by 

Attest : 

Secretary. President. 

Advertisements usually state that "the principal 
is payable in gold," which really means nothing so 
long as our nation is on a gold basis. In fact, 
Thomas A. Edison says that bonds would be much 
better if payable in wheat, iron or wool. Adver- 
tisements of bond issues also state the ^^denomina- 
tion" — that is, the ^^size" of the principal. Most 
bonds are in denomination of one thousand dollars 
which is the case of the bond in the foregoing illus- 
tration. Some issues, however, are in denomina- 
tion of five hundred dollars and a very few in de- 
nomination of one hundred dollars. In short, the 



58 BONDS AND STOCKS 

denomination shows the minimum amount of 
money which can be invested in a given issue. 

The Coupons. 

As the above bond is due April 1, 1934, there are 
now many coupons remaining to be cut off, and each 
coupon reads the same, except for the date when it 
is to be paid. These dates differ in the following 
manner : the next coupon to be cut off, we will 
assume, is due October 1, 1912, the next is due six 
months later or April 1, 1913, the next, six months 
later or October 1, 1913, and so on, the final cou- 
pon being due April 1, 1934. Each of these cou- 
pons call for the payment of $20. which is six 
months interest at 4% on $1,000. 

The coupon in detail is as follows : 

On the first day of October, 1912. 
THE EAILWAY COMPAlN^Y 

will pay to bearer at its office or agency in the city 
of E'ew York, New York, on surrender of this 
coupon TWENTY DOLLAES in gold 
coin without deduction for taxes, being 
six months' interest then due on its first 
and refunding mortgage gold bond un- 



$20 



less said bond will have been called for 
previous redemption. 



No. 
250 



Assistant Treasurer. 

Therefore, "coupons" are practically checks of a 
corporation drawn and dated in advance. If a 



THE INVESTOR'S VOCABULARY 59 

man, when giving a mortgage on his house for three 
years should, in addition to making out the note, 
also make out six checks for the interest, these 
would correspond to the coupons of a bond. One 
might think that the holder of the note, could im- 
mediately deposit and collect all of these checks; 
but if he should attempt this, he w^ould find that 
the bank would not honor them until on or after 
the date when they are due. It is the same with 
the coupons of a bond. 

When the time arrives, however, for a given cou- 
pon to be due, it is simply necessary to cut it off 
and deposit it in the bank the same as one would 
deposit an ordinary check. 

Stock Certificates. 

Of course, if bonds did not bear a definite rate 
of interest it would be impossible to prepare these 
coupons in advance. The fact that stocks usually 
do not bear a definite rate of interest is the reason 
why stock certificates do not carry coupons. The 
dividend on a stock is subject to change and may 
be increased or decreased from time to time. 
Therefore, the purchaser of ten shares of stock 
receives simply the principal, so to speak, without 
any coupons. This principal, however, is not a 
note such as the purchaser of a bond receives, but 
rather simply a '^certificate of part owmership in 
the business," and therefore this is technically 
known as a ^^certificate." The holder of certificates 
of stock receives his interest by checks direct from 
the treasurer of the company. Consequently, in 



60 BONDS AND STOCKS 

the case of corporations which declare six per cent, 
dividends, payable semi-annually, January and 
July, the holder of a certificate of ten shares of 
stock receives every six months a check for $30. 
This, of course, he deposits in his local bank, the 
same as he would deposit any check which he 
receives, or the coupons which he cuts from his 
bonds. 

Therefore, it will be seen that the first three 
terms with which the investor should become ac- 
quainted are, ^^Principal," which refers to the note 
of the bond, "Coupon," which refers to the interest 
of the bond, and "Certificate," which refers to the 
evidence of ownershij) of a stoch. However, it 
should be constantly in mind that this certificate of 
stock is not a promise on the part of the railroad 
company to pay any sum at any definite time, but 
show^s only that the holder thereof has a certain 
"part interest" in the business. In fact, the holder 
of a certificate of stock is, in a way, liable for the 
payment of the notes or the bonds of the corpora- 
tion in which he is a stockholder. The following 
is the wording of a certificate of stock. 

Incorporated under the Laws of — 

ISTo. Shares 

The Railway Company^ Iitcokpoeated 

Capital Stock $ 

This Certifies that is the owner of 

Shares of the Capital Stock of the 

RAILWAY COMPAI^Y, IIsTCORPORATED 
transferable only on the Books of the Corporation 



THE I^^'ESTOR'S VOCABULARY 61 

in person or bv Attorney upon surrender of this 
Certificate. 

In Witness Whereof, the duly authorized officers 
of this Corporation have hereunto subscribed their 
names and caused the corporate Seal to be hereto 
affixed this day of A. D. 191—. 



7 > 

Treasurer. President. 

SHAKES $100 EACH 



Assignment on Back of Certificate. 

Eor Value Keceived, hereby sell, assign and 

transfer unto Shares of the 

Capital Stock represented by the within Certificate, 
and do hereby irrevocably constitute and appoint 

Attorney to transfer the 

said Stock on the books of the within named Cor- 
poration with full power of substitution in the 
premises 

Dated 19 . 

in presence of 



Unlike bonds (unless these certificates are regis- 
tered) the name of the party holding the stock 
should be written on the face of the certificate. 
Therefore, ^before a stock certificate can be sold, it 
must be assigned to some other person. Eor the 
purpose of such an assignment, there is usually a 
blank on the back of each certificate which must be 
filled in, before the treasurer of the company will 



62 BONDS AND STOCKS 

cancel said certificate and issue a new certificate in 
the name of another party. 

An investor, however, when selling stock repre- 
sented by a certificate need usually sign his name 
only at the bottom of the transfer blank with a date 
and a witness, leaving the broker to fill in the rest 
of the blank. Of course, if the certificate is for 
twenty shares, and it is desired to sell only ten 
shares, then the investor may signify on the back of 
the certificate, in connection with the transfer 
blank, that he desires to transfer only ten shares of 
the within mentioned stock. In such a case the 
broker will fill in the name of the party to whom the 
ten shares are to be sold, and the treasurer of the 
company will then make out two certificates of ten 
shares each. One of these certificates will be issued 
in the name of the new party, and the other in the 
name of the original holder. 

Eegistration. 

In the above description of the printed matter 
which appears on the two sheets of a regular bond, 
no mention has been made of what appears on the 
reverse side of said sheets. In the case of the cou- 
pons, there is usually a number on the back of each 
coupon, corresponding with the number of coupons 
that have been cut off. This number enables cou- 
pon clerks, or the treasurer of the corporation, 
to know quickly, without reference to the date, 
whether or not any person is attempting to cash a 
coupon before it is due. In the same way the 
number on the face of the coupon serves to trace 



THE INVESTOR'S VOCABULARY 63 

lost and stolen bonds, as it is the number corre- 
sponding to the number on the principal of the 
bond. * 

The reverse side of the sheet containing the prin- 
cipal of the note is used for an entirely different 
purpose, and contains a blank form used for pur- 
poses of registration. Of course, there are some 
issues which do not have this blank form, and there- 
fore cannot be registered in any way; but most 
bonds have a blank form of some kind, and there- 
fore are entitled to one of the following four forms 
of registration, viz. : — 

(a) Registration as to lorincipal only — that is, 
the principal when due will be paid only to the 
party whose name is written on the back of the 
bond. 

(b) Registration as to principal and interest — 
that is, the principal and also the interest will be 
paid only to the party whose name appears on the 
bond. In this latter case, the coupons are cut off 
by an officer of the company and all interest is 
thereafter paid by check, as in the case of a note. 

(c) Plain registered bonds. — In this c^se, in- 
stead of writing the holder's name on the back of 
the bond, a new registered bond is given in ex- 
change for the coupon bond. These registered 
bonds look like stock certificates. 

(d) IntercJiangeahle. — In this case any one of 
the above forms may be exchangeable for any other 
form. This is the latest and most approved method 
of registration. 



64 BONDS AND STOCKS 

The main reason for these different forms of 
registration are as follows: 

An ordinary coupon bond, payable to bearer, if 
lost is the same as lost money and whoever finds it 
can, if not detected, dispose of it. 

(a) If registered as to principal, the finder can 
dispose of only the coupons every six months and 
not the bond, and so cannot collect the principal at 
maturity. Moreover, if the owner has a record of 
the bond's number, the finder can be traced if he 
deposits said coupons. 

(b) If registered as to principal and interest, 
the finder cannot collect any coupons, as the interest 
is sent by check to the registered holder direct ; nor 
can the finder collect the principal at maturity, as 
this will be paid by check drawn payable to the 
party in whose name the bond is registered. 

(c) If a plain registered bond, it would be 
treated the same as (b). 

For trust funds and permanent investments, 
bankers recommend either class (b) or class (c) ; 
but for ordinary investors, class (a) is very 
satisfactory. An ordinary coupon bond, principal 
and interest payable to bearer, allows the free use 
of the coupons and still protects the holder, it being 
comparatively easy to trace such theft, and the 
finder could probably never cash more than one 
coupon. 

The vast majority of investors do not register 
their bonds in any form, as many have safe deposit 
boxes in which to keep them, and careful investors 
should always keep a record of the name and num- 



THE INVESTOR'S VOCABULARY 65 

ber of all bonds owned. Whether or not it is best 
to have a bond registered, and if so, in what form, 
depends very much upon whether or not the bond is 
to be a permanent investment. IsTevertheless, it is 
well for the small investor to purchase only such 
bonds as can be registered in one of the three ways 
and if possible, bonds that are also interchangeable. 

Moreover, if at any time an investor desires a 
bond registered, he must not write any name on it 
himself. A bond salesman will send an investor 
full particulars as to how and to whom to send a 
bond for registration. The investor should either 
send it through his local bank by express insured, 
taking a receipt therefor, or else if the firm whom 
the salesman represents is located in his own city 
and strictly reliable, take it to said firm, obtaining 
a receipt therefor and arrange with them to have it 
registered. The investor should clearly under- 
stand, however, that the same trouble and care must 
be exercised if at any time he desires to dispose of 
the bond or borrow on it, or make it payable to some 
other party. 

Which of the above forms of registration any 
special issue possesses, is almost always mentioned 
in the advertisements or circulars describing an 
issue, and most of the new, large issues are de- 
scribed as follows: ^'The bonds are issued either 
as Coupon or Registered Bonds and are Inter- 
changeable." This means that the holder may have 
a regular coupon bond, with both principal and 
interest payable to bearer ; or a registered bond in 
the form of a certificate, with his name written 



66 BONDS AND STOGIES 

thereon, and the interest payable by check ; and in 
addition, either form may at any time be exchanged 
for one of the other forms. This is the case with 
the bond, a copy of which is given in the foregoing 
illustration. 

'^Accrued" or ^^And Interest'' Prices. 

Another phrase most common to these bond ad- 
vertisements is as follows : ^'Price 105-1/2 and 
accrued interest to delivery.'' Assu.ming that the 
bonds are in denomination of $1,000 each, this 
means that the bonds may be purchased for $1,055 
plus the accrued interest to date of delivery. If 
bonds had coupons attached for each day, instead 
of each six months, there would be no need of the 
seller adding the accrued interest to the price of the 
bond, as he could cut off the coupons up to the day 
of delivery. 

In the case however of a bond, the coupons of 
which are payable we will say only on every Janu- 
ary 1st and July 1st, covering six months' interest, 
there would be no accrued interest for the purchaser 
to pay on the first day of January or on the first 
day of July. Assuming, however, that these cou- 
pons are for thirty dollars each, on the first day of 
February the next coupon to cut off becomes worth 
five dollars, so to speak, because the purchaser of 
the bond has only five months to wait for his inter- 
est instead of six. Therefore, it is only just that a 
man who waits until the first of February before 
investing his $1,000 should pay five dollars more 
for the bond -than the man who invested his $1,000 



THE INVESTOR'S VOCABULARY 67 

on January 1st preceding, because the first man 
has had his $1,000 for his own use during the entire 
month of January. 

If the purchaser of the above mentioned bond 
buys the same April 1st and the price is ^^105-1/2 
and accrued interest," he pays $1,055 plus the ac- 
crued interest for three months at 6% which is 
$15.00, making a total of $1,070. Therefore, "and 
accrued interest" price means that the buyer pays 
the seller the interest which has accumulated since 
the last coupon was paid. But the buyer receives 
the interest back when the next coupon becomes 
due, for the coupon represents the interest to be 
paid on the bond for the entire period between 
interest payments. 

Flat Prices. 

A "flat" price, on the other hand, is the price 
quoted that includes the interest from the time of 
the last payment of interest to the time of selling. 
For example, if the "flat" price of a bond is 
$970, the actual price might be $950 with twenty 
dollars interest added. Since January 1st, 1909, 
all bonds bought or sold on all the leading Ex- 
changes are sold "and interest ;" that is, the pur- 
chaser is obliged to pay the accrued interest when 
he buys such bonds and receives any accrued inter- 
est when he sells them. The interest is always 
figured at the rate of 30 days to the month, except- 
ing possibly for the partial month. Income bonds 
and defaulted bonds are still sold "flat." 

Another point to remember, is that interest is 



68 BONDS AND STOCKS 

always figured up to, but not including, tlie day of 
payment. To illustrate : — if on April 1, 1909 an 
investor purchased at 102 ^^and interest" a $1,000 
Chicago, Burlington & Quincy 4% Bond, the cou- 
pons of which are payable January 1 and July 1, 
he paid $1,020 ^^and interest" from January 1st to 
April 1st, at 4% or $10, making $1,030 in all. 
Moreover., if he paid the money on April 1st, the 
dealer would not count the interest for said day 
but would stop with the close of the preceding day. 
In other words, if an investor pays for a bond in 
March 21st, the dealer figures only two months and 
twenty days interest. 

The Yield of Securities. 

When considering the price of securities, there 
are two factors to consider ; namely, the premium, 
that is, the percentage above par at which the 
securities are selling ; and secondly, the rate of in- 
terest which is paid on the par value. In the case 
of stocks, these are the only two items necessary to 
know in order to figure the net yield. In fact, it is 
necessary only to divide the total income received 
in the form of dividends during one year by the 
amount of money paid for the stock. If, for in- 
stance, ten shares of stock paying a total dividend 
of $40 a yeai" are purchased for $1,000, this stock 
will yield 4 % . If the ten shares are purchased for 
$1,200,^ it will-be found that the stock yields only 
3-1/3% ; while if the shares are purchased for $800, 
it will be found to yield 5%. This is because in 
the first case the stock was bought at par; because 



THE IXVESTOR'S VOCABULARY 69 

in the second case it was bought at a premium at 
20%, while in the third case it was bought at a 
discount of 20%. For quick reference purposes, 
the following table is very useful in quickly obtain- 
ing the yield of any stock : 

Eate of Income on Stocks. 

Purchased at following prices — par value $100 — 
and bearing interest at following rates. 



Paid 


27c 


3% 


4% 


5% 


69o 


7% 


8% 


10% 


$ 50 


4.00 


6.00 


8.00 


10.00 


12.00 


14.00 


16.00 


20.00 


m" 


3.81 


5.71 


7.62 


9.52 


11.43 


13.33 


15.24 


•19.04 


55 


3.63 


5.45 


7.27 


9.09 


10.91 


12.72 


14.55 


18.18 


57^ 


3.48 


5.22 


6.9G 


8.70 


10.43 


12.17 


13.91 


17.40 


60 


3.33 


5.00 


6.67 


8.33 


10.00 


11.67 


13.33 


16.66 


m 


3.20 


4.80 


6.40 


8.00 


9.60 


11.20 


12.80 


16.00 


65 


3.08 


4.62 


6.15 


7.69 


9.23 


10.77 


12.31 


15.38 


671 


2.96 


4.44 


5.93 


7.41 


8.89 


10.37 


11.85 


14.82 


70 


2.86 


4.29 


5.71 


7.14 


8.57 


10.00 


11.43 


14.28 


72J 


2.76 


4.14 


5.52 


6.90 


8.27 


9.65 


11.03 


13.80 


75 


2.67 


4.00 


5.33 


6.67 


8.00 


9.33 


10.67 


13.35 


77i 


2.58 


3.87 


5.16 


6.45 


7.74 


9.03 


10.32 


12.90 


80 


2.50 


3.75 


5.00 


6.25 


7.50 


8.75 


10.00 


12.50 


82^ 


2.42 


3.65 


4.85 


6.06 


7.27 


8.48 


9.70 


12.12 


85 


2.35 


3.53 


4.71 


5.88 


7.00 


8.24 


9.41 


11.76 


87^ 


2.29 


3.43 


4.57 


5.71 


6.86 


8.00 


9.14 


11.42 


90 


2.22 


3.33 


4.44 


5.56 


6.67 


7.78 


8.89 


11.11 


92i 


2.16 


3.24 


4.32 


5.41 


6.49 


7.57 


8.65 


10.82 


95" 


2.11 


3.16 


4.21 


5.26 


6.32 


7.37 


8.42 


10.52 


97^ 


2.05 


3.08 


4.10 


5.13 


6.15 


7.18 


8.21 


10.26 


100 


2.00 


3.00 


4.00 


5.00 


6.00 


7.00 


8.00 


10.00 


102 


1.96 


2.94 


3.92 


4.90 


5.88 


6.86 


7.84 


9.80 


104 


1.92 


2.88 


3.85 


4.81 


5.77 


6.73 


7.69 


9.62 


106 


1.88 


2.83 


3.77 


4.72 


5.66 


6.60 


7.55 


9.44 


108 


1.85 


2.78 


3.70 


4.63 


5.56 


6.48 


7.41 


9.26 


110 


1.82 


2.73 


3.64 


4.55 


5.45 


6.36 


7.27 


9.10 


115 


1.74 


2.61 


3.48 


4.35 


5.22 


6.09 


6.96 


8.69 


120 


1.67 


2.50 


3.33 


4.17 


5.00 


5.83 


6.67 


8.33 



70 



BONDS AND STOCKS 



Paid 


2% 


3% 


4% 


5% 


6% 


7% 


8% 


10% 


125 


1.60 


2.40 


3.20 


4.00 


4.80 


5.60 


6.40 


8.00 


130 


1.54 


2.31 


3.08 


3.85 


4.62 


5.38 


6.15 


7.70 


135 


1.48 


2.22 


2.96 


3.70 


4.44 


5.19 


5.93 


7.40 


140 


1.43 


2.14 


2.86 


3.67 


4.29 


5.00 


5.71 


7.14 


145 


1.38 


2.07 


2.76 


3.45 


4.14 


4.83 


5.52 


6.90 


150 


1.33 


2.00 


2.67 


3.33 


"4.00 


4.67 


5.33 


6.66 


155 


1.29 


1.94 


2.58 


3.23 


3.87 


4.52 


5.16 


6.46 


160 


1.25 


1.87 


2.50 


3.12 


3.75 


4.37 


5.00 


6.25 


165 


1.21 


1.82 


2.42 


3.03 


3.64 


4.24 


4.85 


6.06 


170 


1.18 


1.76 


2.35 


2.94 


3.53 


4.12 


4.71 


5.88 


175 


1.14 


1.71 


2.29 


2.86 


3.43 


4.00 


4.57 


5.72 


180 


1.11 


1.67 


2.22 


2.78 


3.33 


3.89 


4.44 


5.55 


185 


1.08 


1.52 


2^16 


2.70 


3.24 


3.78 


4.32 


5.40 


190 


1.05 


1.58 


2.11 


2.63 


3.16 


3.68 


4.21 


5.26 


195 


1.03 


1.54 


2.05 


2.56 


3.08 


3.59 


4.10 


5.12 


200 


1.00 


1.50 


2.00 


2.50 


3.00 


3.50 


4.00 


5.00 



Example : A 6-per-cent stock selling at 82-1/2 
yields 7.27. 

Look down 6-per-cent column until opposite 
82-1/2. 

Yield of a 12-per-cent stock will be double a 6- 
per-cent stock at the same price. 

In the case of bonds, however, there is an addi- 
tional feature besides the two above mentioned; 
namely, the date of maturity of said bonds. A 
stock is an equity which never matures nor becomes 
due ; but a bond is an ohligation which becomes due 
at a definite price and on a definite date. There- 
fore, a 4% bond purchased at 80 is considered to 
yield more than a 4% stoch purchased at 80; 
although in order to ascertain the yield, it must be 
known when said bond matures. If the above men- 
tioned 4% bond selling at 80 matures in ten years, 



THE INVESTOR'S VOCABULARY 71 

this bond will yield approximately 7% instead of 
6%. This is because, in addition to the 5% figured 
on the same basis as one figures the income on stock, 
there is an additional yield, owing to the fact that 
when said bond becomes due in ten years, the pur- 
chaser thereof will receive $1,000 instead of $800, 
giving a ''bonus" of $200. This bonus divided by 
the number of years, namely ten, makes an addi- 
tional income of $20 per year, w^hich added to the 
original $40 per year makes a total theoretical in- 
come of $60 a year. 

Of course, this is a very rough method of calcula- 
tion, there being a number of features, such as 
interest upon interest and other important items 
which should be considered. In fact, to obtain the 
correct yield of any given bond, one should refer to 
the prepared tables of bond values which may be 
obtained through any bond house, and which are 
worked out accurately by logarithms. In the case 
of odd divisions — such as 100 divided by 3 — 
absolute accuracy is never reached, although the 
further the decimal is carried out, the greater the 
accuracy. A table of Bond Values with the deci- 
mals carried out seven places is therefore more 
accurate than a table with the decimal only three 
places, and in large transactions, it sometimes makes 
a great difference to the buyer or seller. With 
slight instruction, an investor can use the tables 
and find out any yield for himself. 

In this connection it is interesting to emphasize 
a fact that every one ought to know and keep con- 
stantly in mind that the yield on any investment. 



72 BONDS AND STOCKS 

no matter what it is; is based on the amount of 
money invested in the enterprise^ not on the prin- 
cipal, as for example, the principal of a bond. 

The following rules relative to yield are self 
evident : — 

(a) Bonds selling at a discount^ yield more as 
the price becomes less ; as the rate is increased and 
as the length of time before maturity is shortened. 

(b) Bonds selling at a premium^ yield more as 
the price becomes less, as the rate is increased and 
as the length of time before maturity is lengthened, 

A very successful banker gives the following 
advice : 

/when rates of interest are high and bonds are 
clieap, buy long term bonds running say 30 or 50 
years, and ^^non-callable." 

, ^'When rates of interest are low and bonds are 
igh, buy short term bonds maturing in from one 
to three years and non-callable." 

Sinkins: Funds. 



■■& 



Often in bond advertisements, the bonds are re- 
ferred to as ''Sinking Fund Bonds." This means 
that each year, after a certain date, a certain sum 
of money is supposed to be set aside either for the 
purpose of having a partial fund on hand to redeem 
said bonds when they mature, or else to redeem a 
certain portion of them each year. In the latter 
case, the bonds must also be known as ''Callable" 
or "Redeemable" as well as "Sinking Fund 
Bonds." Some of the leading financiers do not 
care for the sinking fund feature, but much prefer 



THE INVESTOR'S VOCABULARY 73 

"Serial Bonds/' as in the latter case, each holder 
knows definitely when his bonds are to be paid. 
This eliminates not only the uncertainty of having 
one's bonds called in for payment at an inoppor- 
tune time, but in addition prevents the company 
from losing the sinking fund before the bonds 
mature. 

Therefore, up to a very few years ago there 
were practically no serial bonds on the market, and 
either no provision Avas made for the redemption of 
bonds or else a sinking fund was accumulated and 
invested from time to time until the bonds matured. 
In the latter case, either a few bonds w^ere called by 
lot every year, or a like fund was allowed to accu- 
mulate until the bonds matured. In the case of 
towns, municipalities and counties, the latter 
method was generally pursued and these sinking 
funds h^ave often been the source of great graft arfd 
dishonesty among public officials, ^ow, however, 
this temptation has largely been eliminated through 
the issuance of serial bonds whereby certain definite 
bonds must be paid or cancelled each year. 

Excepting in the case of mining companies and 
corporations whose property naturally deteriorates, 
sinking fund bonds have no great advantage to the 
purchaser, and other circumstances being the same, 
sinking fund bonds are no better secured than bonds 
without a sinking fund. In other words, if a bond 
is not well secured without a sinking fund, it is 
generally true that no sinking fund will make it 
safe; excepting, however, in the case of mining 
companies where the actual security for the bonds 



74 BOXDS AND STOCKS 

is being sold. As to the advantages and disad- 
vantages of a sinking fund, the following concrete- 
ly expresses the case : 

Advantages (1) A Sinking Fund enables a 
company to reduce its bonded indebtedness by buy- 
ing and cancelling its own bonds. 

(2) Bonds secured by a sinking fund are usual- 
ly secured by closed mortgages, and therefore have 
a greater prospect of becoming underlying liens. 

Disadvantages (1) If a corporation is able to 
provide a Sinking Fund, its bonds are perfectly 
good without such a fund, 

(2) When sinking funds are arbitrarily re- 
quired, there is a temptation to deduce maintenance 
charges to a minimum, and this retards a healthy 
growth and development. 

Callable or Optional Bonds. 

Another word often appearing in bond circulars 
is the word ^'callable." When a 5% bond that is 
due in 50 years is "callable" or "optional" in 10 
years, this means that if in ten years, rates are low 
and the credit of the company is high, the company 
will exercise its option of paying the bonds at par 
or some other figure (which is always less than 
their intrinsic value) and issuing in their stead a 
4% bond. This fact not only places an absolute 
limit upon the premium at which the bonds can 
ever possibly sell, but also results in the investor 
being paid his money at the most unfavorable time 
when it is impossible to re-invest it on favorable 
terms. In other words, bonds are "called" only 



THE INVESTOR'S VOCABULARY 75 

when money rates are low and the prices of bonds 
are high. Moreover, if the company ''calls" the 
bonds to pny them because their credit has so im- 
proved that they can issue bonds at a lower rate, 
this simply means that, if the bonds become very 
good, they will be paid, but if the company's credit 
becomes unsettled and their bonds unmarketable, 
then they will not be paid. In other words, if it is 
to the advantage of the holder not to have them 
paid, they will be paid ; but if it is to the advantage 
of the purchaser to have them paid, they will not 
be called. Therefore, whether they are paid owing 
to lower rates of money or to the improved credit 
of the company, the holder is the loser and the 
company the gainer. 

For this reason, many investors prefer not to 
purchase "callable" or "optional" bonds, excepting 
in the case of certain industrial companies such as 
manufacturing or mining companies where the 
assets are always growing less, and a sinking fund 
is absolutely necessary. This, however, brings up 
the question whether or not it is ever advisable to 
buy a bond of an issue where a sinking fund is 
absolutely necessary, in order to preserve the secur- 
ity of the issue. Another, though less serious 
objection to "callable" bonds is that instead of 
being definitely called by number in order begin- 
ning with ;^o. 1, they are usually called by "lot." 
This means that often the holder does not know 
until sometime afterwards (when he is depositing 
a coupon) that the bonds have been "called." In 
fact, the first notice often consists of a return of 



76 BONDS AND STOCKS 

the coupon with a notice that ^^the bond was called 
six months ago." This means that the holder must, 
in addition to the trouble involved, lose six months' 
interest. As to the relative advantages and disad- 
vantages of this callable clause, the following fairly 
states the case : 

Advantages: (1) The investor often receives 
up to the time the bonds are "called," a higher rate 
of interest than he would receive with the same 
security, without the optional feature. 

(2) An optional feature enables the company 
to create a Sinking Fund which is always desirable. 

Arguments Against: (1) The bonds will never 
be called when other bonds are cheap or if the 
credit of the company is poor, but may be called if 
other bonds are high and the credit of the company 
is good. 

(2) The advantages of Sinking Funds may be 
obtained without the necessity of having the bonds 
of a company "^^callable." 

It was mentioned above that advertisements 
sometime state that the bonds are "callable" or 
redeemable at a certain price on or after, a certain 
date. For instance, the bond used in the above 
illustration was redeemable at 105 and interest; 
although since April 1, 1911, the company has lost 
this privilege. A large part of the United States 
Government Bonds are redeemable at par on or 
before a certain date, all of which is explained in 
the respective advertisements of the various issues. 



THE I]N^^ESTOR'S VOCABULARY 77 

The Trustee, Mortgage and Legal Opinion. 

In studying the advertisements of bond issues, 
two other features are noticed, namely; (1) the 
advertisement always states the name of the trust 
company which is acting as trustee, that is, who 
stands between the various individual bond holders 
scattered all over the country and the corporation 
issuing the bond, assuring justice to both interests ; 
and (2) the advertisement states what attorneys 
have passed upon the legality of the issue. 

"When dealing with individuals, one personally 
takes their note, and the borrower mortgages his 
property direct to the lender. If an entire bond 
issue could be taken and personally held by one 
individual permanently, only two parties would be 
necessary and the company could mortgage its 
property directly to the individual who loans the 
money. In practice, however, an issue of bonds is 
divided up among many individuals, and as the 
bonds are payable to bearer, the company often does 
not know the names of these individuals. 

Therefore all bonds are nothing more than notes 
made payable to bearer, sometimes secured and 
sometimes not. Mortgage bonds are the same as 
notes which accompany a mortgage. If a mortgage 
on a house is to be for $10,000, the borrower can 
as well give to the mortgagee ten notes, payable to 
bearer for $1,000 each, as to give one note for 
$10,000. These notes, therefore, may be distrib- 
uted among a number of different persons. 

The mortgage cannot be divided up and held by 
a large number of individuals ; and therefore it is 



78 BONDS AND STOCKS 

necessary, in the case of a bond issue, to select some 
neutral and impartial third party who will act as 
trustee, and to whom the company will mortgage 
its property for the interests of all who hold the 
bonds or notes, at any given time. 

For this reason, three parties are usually con- 
nected with every mortgage bond issue. This, by 
some, is given as the distinguishing feature between 
a company's note or its commercial paper, and a 
company's bond issue. These three parties are : — 

1. The company or mortgagor which receives 
the money. 

2. The bondholders or the persons who loan the 
money. 

3. The trustee or bank which is technically the 
mortgagee, but solely in the interests of the bond- 
holders who loan the money. 

If the bonds are mortgage bonds, the advertise- 
ment of the issue states that the purchaser may 
obtain a copy of the mortgage securing the issue. 
Very few investors ever take the trouble to read 
these mortgages before purchasing ; but it is a very 
good idea for all investors to have them on file. 
This is especially important for banks and institu- 
tions purchasing large blocks, and as above stated, 
it does no harm for even the small investor to 
request that a copy of the' legal opinion, engineer's 
report, mortgage and other papers which the firm 
has on hand, be sent along with the bond ordered. 

In advertisements of bond issues, we also see 

stated, '^We have the Legal Opinion of , a 

copy of which may be seen at our office." 'No sane 



THE INVESTOR'S VOCABULARY 79 

man woialcl think of investing $5,000 in a local real 
estate mortgage without having an attorney's opin- 
ion upon that title, form of mortgage, etc. There- 
fore, careful investors should use the same care 
when investing in bonds. All reliable and estab- 
lished bond dealers have these opinions on file, and 
will gladly give copies together with a descriptive 
circular of the bonds. In case any unforeseen 
trouble arises, these papers are often a great help 
in enabling the investor or his heirs to study the 
conditions and decide what action to take. In this 
connection it may be well also to mention the mean- 
ing of the word "escrow." Some advertisements 
state, for instance, that the issue for "$5,000,000 
with $3,000,000 outstanding and with $2,000,000 
held in escrow." Of this $2,000,000 held in 
escrow, $1,000,000 are held for retiring underlying 
liens, and the balance for improvements, additions, 
etc., under proper restrictions. Therefore, the 
word "escrow" is in reality simply a synonym for 
the word "reserve." 

Guaranteed Bonds. 

The final feature which we have not yet covered 
is the question of guarantee. Many bonds are 
advertised as being "guaranteed both as to princi- 
pal and interest." The question of guarantees is 
a very important one, and it should be treated in an 
article by itself. Sufficient it is to say, however, 
that there are very few issues which, if not perfect- 
ly good of themselves ivifJiout a guarantee, are not 
good with 8L guarantee. It has usually been found 



80 BONDS AND STOCKS 

that if a company believes a bond to be good, it is 
willing to guarantee it, and in such a case, the 
guarantee does not usually add to its strength. On 
the other hand, if the bond is not good of itself, a 
company often endeavors to discover some method 
by which it can break its guarantee. Therefore, no 
bonds should be bought simply on the strength of 
their guarantee, but rather should be judged for 
their value irrespective of the guarantee. If the 
bonds are perfectly good without any guarantee, it 
is, of course, an additional advantage and an addi- 
tional safe-guard to have the bonds guaranteed; 
but bonds which are good simply on account of 
their guarantee are usually not very attractive pur- 
chases. This is especially triie of bonds which are 
simply guaranteed as to principal and not as to 
interest. 

Three Classes of Commercial Paper. 

Commercial paper is really issued for three pur- 
poses, viz. : — 

(1) To provide additional, permanent or semi- 
permanent capital for carrying a large sto^ of 
merchandise, if not assets of a more fixed nature. 

(2) To enable the borrower to give greater 
credit to buyers. 

(3) To carry a firm over "the peak of its load" 
which "peak" almost every business has. 

The ablest bankers do not believe in commercial 
paper issued for the first mentioned purpose. They 
care not how large or how small a firm's capital 
is, provided it is in the form of contributions 



THE INVESTOR'S VOCABULARY 81 

by members of the firm if it is a firm, or in the 
form of capital stock, if it is a corporation. It is 
a mistake, however, for any manufacturer, mer- 
chant or storekeeper to borrow money on notes for 
an increased capital. Such notes, it is necessary 
to renew continually when they become due, and a 
firm or corporation which has issued notes for 
capital for any length of time finds it almost im- 
possible to break away from the habit. It is a bad 
habit, and is at the bottom of commercial failures 
today. • It is comparatively easy to borrow money ; 
but it is a vastly different thing to pay up the notes. 
As a good, hard headed business man used to say, 
"If you want to have the winter last but a short 
time, discount a four months' note about the first 
of J^ovember." Although the majority of com- 
mercial paper today belongs to the first class, yet 
its purchase should not be advised. Borrowing 
money for permanent, merchandise capital require- 
ments should always be opposed. 

The second class of commercial paper, that 
issued for enabling a firm to increase its accounts 
receivable, should in many cases be treated the 
same as the first class above mentioned; but there 
are exceptions to this rule, and these exceptions 
depend largely upon the character of the accounts. 
For a manufacturer of millinery, an article which 
is very perishable and of large profits, to issue 
paper in order to increase its accounts receivable, 
does not seem very good business, as the accounts 
of certain small retail millinery concerns may not 
be especially attractive. On the other hand, for a 



82 BONDS AND STOCKS 

concern that deals in copper, pig iron or some other 
commodity, which over a comparatively few months 
fluctuates very little in price and is very market- 
able, to issue paper in order to increase its accounts 
receivable may be good business. Of course, when 
judging class two, it depends entirely upon the 
character of the firm issuing the paper, and each 
instance should really be decided independently on 
its own merits. Otherwise the leaner of the money 
had better purchase notes that are known as "re- 
ceivables." 

Eeceivables. 

We will give herewith a brief explanation of 
what is meant by receivables : As an example, we 
will state an account of the transaction between a 
bank and a medium grade concern. A member of 
the latter once came to the aforesaid bank and 
wished to borrow $10,000 in order to extend $2,500 
additional credit to four good customers. The bank 
did not wish to loan the money permanently for 
additional capital purposes, but if the concern in 
question would obtain four notes of $2,500 each, 
one from each of the firms mentioned, endorse them 
and bring the notes to the bank, the bank would 
discount them. By doing this, three things were 
accomplished ; first, it was shown that the money is 
to be used for increasing accounts receivable, rather 
than for buying more unsold merchandise. Second, 
there was som.e definite lien on a certain portion of 
these accounts receivable which were believed to be 
good, rather than an indefinite general interest in 



THE INVESTOR'S VOCABULARY 83 

tliem all; and third, tlie local firm was not liable 
for tLe payment of the notes except as a last resort. 
In short, the eggs were placed in four baskets in- 
stead of one, and all baskets were guaranteed by the 
local firm which endorsed all four notes. 

Therefore, by ^'receivables," are meant notes 
which a firm has received in payment for goods 
sold, and which notes it endorses and discounts at 
some bank. Of course, some firms feel that it is 
poor policy to give these receivables, not desiring to 
give away their customers. Moreover, if one bank 
is given receivables, all banks loaning to the firm 
expect receivables likewise. Therefore, many large 
corporations refuse to give any of their customers' 
notes to their creditors, but keep said notes in their 
o^^^l vaults, refusing to use receivables on any ac- 
count. Of course, for large firms this is an entirely 
proper practice; but smaller and medium grade 
firms which have not clearly established a high 
credit should not object to giving receivables when 
the money is desired for extending credits, — still 
less for permanently extending credits^ 

This brings us to the third class of commercial 
paper, where the money is borrowed simply for 
carrying a firm over its busy season. This is the 
kind of paper that the ablest bankers endeavor to 
purchase for their own banks, and which they 
should recommend to various other institutions. 
There are many illustrations of this third class of 
commercial paper; but perhaps the best is that 
issued by wool houses in Boston. These wool houses 
are obliged to buy wool in the summer, hold it for a 



84 BONDS AND STOCKS 

few months until the manufacturers take it off their 
hands, and often in the spring these houses have 
no wool whatsoever. Of course, thej all have a 
large capital and this capital they often loan in the 
season when they are not carrying wool. In such 
a business however, it is almost as bad to have too 
much capital as too little. Consequently, the wool 
merchant begins in the summer to purchase wool 
with his own capital as long as the capital lasts, 
which is up to the '^peak of the harvest time," when 
he borrows money v/ith which to purchase more 
wool. This money is used for carrying him over 
the winter, and the first wool which he sells after 
the first of the year is used for paying up his notes, 
although he does not get his own capital from all 
the wool until it is almost time for another shear- 
ing. 

The Best Kind of Commercial Paper. 

It therefore willbe seen that the best kind of 
commercial paper is that of firms who borrow only 
for a certain season of the year to carry them over 
^^the peak of the load." Such firms have sufiicient 
capital for their ordinary business, but desire an 
increased capital for three or four months. Rather 
than have a surplus of funds for eight months of 
the year, these firms feel that it is better judgment 
to borrow for four months of the year, and they are 
certainly justified in such a course. There is a 
manufacturer of hammocks in Gloucester, Mass., 
who spends eight months of the year in manufactur- 
ing these hammocks which are sold practically dur- 



THE IXVESTOR'S VOCABULARY 85 

ing t^o or three summer months. Xow, this firm 
feels justified in borrowing money for the large 
portion of the duck and labor consumed in the man- 
ufacture of these hammocks during the winter, pay- 
ing up these loans in the summer time when the 
hammocks are sold. In short, the largest institu- 
tions in the country seek borrowers who ^^clean up" 
once a year and are entirely out of debt for a por- 
tion of the year, although it is but for two or three 
months. This money is not borrowed for perma- 
nent capital requirements and therefore, the bank 
is almost always sure to be able to get the money if 
it so desires when the note is due. 

For the benefit of the borrowers, it may be stated 
here that the easiest way to establish a credit is to 
pay notes when they mature and never ask for an 
extension. So arrange your maturities and loans 
that when your notes become due, you can pay 
them, even if you must go back at the end of the 
time to re-borrow the money. Strange as it may 
seem, the average bank does not consider security 
or even a financial statement so much as it considers 
the moral risk, and by moral risk is meant the per- 
sonal character of the borrowers and their record 
for paying notes when they become due. 



CHAPTEE V. 

DIFFERENT CLASSES OF CORPORATIONS ISSUING 
SECURITIES. 

BONDS are not only classified as to their 
form, but also as to the different functions 
of the corporations issuing them. That is 
to say, after one has decided to purchase a well- 
seasoned, underlying lien on some established prop- 
erty, he must then decide whether said property 
shall be railroad property, traction property, elec- 
tric light property, gas property, telephone prop- 
erty or one of a score of the different forms of in- 
dustrial properties. 

Among the different classes of bonds issued by 
the different properties may be mentioned man- 
ufacturing bonds, coal bonds, steel bonds, irrigation 
bonds, timber bonds, real estate bonds, apartment 
house bonds, hotel bonds, mining bonds, and others 
too numerous to itemize. It is, however, a great 
question to decide as to in which of these various 
classes it is best to invest, and obtain as many as 
possible of the following five standard require- 
ments : 

(1) Safety of principal and interest. . 

(2) Good income. 

(3) Marketability. 

(4) Possibility of appreciation. 

(5) Stability. 



DIFFEREXT CLASSES OF CORPORATIONS 87 

The investor does not give very serious thouglit 
to these subjects. In fact, it often seems that the 
average successful business man gives more time to 
selecting his luncheon from the menu card than he 
gives to selecting investments from the circular of 
a bond house. If there is one thing that demands 
adaptability and study, it is investing. However, 
there are many investors who methodically and 
carefully consider these matters, and such people 
may be divided into two main schools, namely : 

(1) Those who believe in the distribution of 
risk. 

(2) Those who believe in the concentration of 
attention. 

Briefly, the first class believes in distributing 
their eggs in a number of different baskets and then 
forgetting these baskets, while the second class 
believes in selecting the very best basket, placing 
their eggs therein, and then persistently watching 
this basket. 

As an illustration of the first class who believe in 
the distribution of risk, there is a firm in London, 
England, which has built up a large business along 
these lines. This corporation has a very interest- 
ing theory, that although each nation is continually 
having periods of depression and prosperity, yet 
the world as a whole is always growing better, and 
if a man will properly divide his investments among 
the important nations of the earth, he ^^can always 
sell out his entire holdings at a profit." Although 
any one who has studied fundamental mercantile 
and monetary conditions must necessarily believe 



88 BONDS AND STOCKS 

in the law of averages, it must be frankly stated 
that the point has not been reached where we can 
accept this theory in total. E'evertheless, this 
English concern is doing good work for devotees of 
the ^^distribution of risk" theory, and is sure to 
build up a great clientele. These people, however, 
are not content simply with distributing invest- 
ments among the nations of the earth, but also sys- 
tematically distribute investments among the dif- 
ferent classes of securities, the chief of which we 
will give as follows : 

(1) Railroad Securities. 

(2) Lighting Securities. 

(3) Traction Securities. 

(4) Telephone Securities. 

(5) Industrial Securities. 

(6) Real Estate and other Securities. 
The idea of this distribution is, of course, that 

certain lines of business are apt to decline, and that 
it is unsafe for one to invest all his money in any 
one class of securities. Although a fair amount of 
distribution is advised, yet when one is confident 
that certain securities are safer than others, '^hy 
should he invest in securities which he believes are 
less safe simply for the purpose of distributing the 
risk? This is often a great mistake, for if there 
should be only a very few issues which one knew to 
be absolutely good, he should confine his invest- 
ments exclusively to these. On the other hand, 
many people invest some of their money in secur- 
ities which they know to be doubtful in order to 
distribute the risk, and apparently this was the 



DIFFERENT CLASSES OF CORPORATIONS S9 

principle that a well-known American writer acted 
upon, judging from the following list of his hold- 
ings, as published after his death. 

Only $8,000, out of a total appraised value of $011,136 was 
found to be invested in bonds — conservatism never distin- 
fTiiished this writer, either in thouo^ht or investment. Of the 
$541,130 of personality, the principal items were: 

American Telephone and Telegraph, common stock, 100 shares 
Utah Consolidated jMining Co., common stock, 1,750 shares 

United Fruit Company stock 165 shares 

Brooklyn Union Gas Company stock 67 shares 

Union Pacific Railway, common 100 shares 

Fentress Land Company 3 shares 

J. Langdon Company 813 shares 

Bonds of Park County, Montana 2 

Bond of Atlantic Gas Light Company 1 

Bonds of Duval County, Florida 5 

Cash in Banks, $49,490. 

Among the souvenir certificates found in his strong box 
were 375 shares of the capital stock of the Plasmon Milk 
Product Company, a concern organized not many years 
before his death. 

The Plasmon Syndicate, Limited (5.000 shares) and the 
Plasmon Company of America (400 shares) were other cer- 
tificates for which the appraisers could get no bids. The 
appraisers also reported this list: 

Hope Organ Company - 50 shares 

Koylo Company 345 shares 

International Spiral Pin Company 113 shares 

American ^Mechanical Cash Reg. Company 32 bonds 

American Mechanical Cash Reg. Company 400 shares 

Probably he had during his lifetime the typical financial 
experience of the intelligent, hopeful American. He "went 
broke" once, but kept up his courage, paid his debts, and 
died after years of work, a rich man. His average of poor 
investments during the last years of his life was undoubted- 
ly lower than in the case of the average American. 

There are, however, able and intelligent finan- 
ciers who believe in this principle of distribution, 
and the following is a plan as outlined by one 
of the ablest men in Boston, a man whose name is a 



90 BONDS AND STOCKS 

household word throughout I^ew England, showing 
the way in which he invested $100,000. one day 
during a recent period of low prices : 

$20,000 in the transportation business, dividing 
the same between the stocks of the Pennsylvania 
Railroad Company and the Illinois Central Rail- 
road Company. 

$20,000 in the agricultural business, buying 
equal amounts of the Virginia-Carolina Chemical 
Preferred stock and the International Harvester 
Company Preferred stock. 

$20,000 in industrial enterprises, buying equal 
amounts of the General Electric Company stock 
and the American Sugar & Refining Company 
stock. 

$10,000 in copper stocks, dividing this amount 
among Calumet & Ilecla, Amalgamated and Utah 
Copper Company stocks. 

$10,000 in the iron and steel business, but con- 
fined this portion of the investment to the purchase 
of United States Steel Preferred stock. 

$10,000 in the lighting business, dividing this 
amount among the stocks of the Consolidated Gas 
Company of ISTew York and the Peoples' Gaslight 
and Coke Company of Chicago and the Edison 
Illuminating Company of Boston. 

This gave him a total of $90,000, and covered 
all of the important lines of trade excepting the 
street railway business, and after considerable dif- 
ficulty, he decided to buy with this portion $10,000 
of Xew York Railways Refunding 4% bonds, 
as he did not find any traction stocks which ap- 
pealed to him. 



DIFFERENT CLASSES OF CORPORATIONS 91 

Although this list is purely an illustration and 
may not be any better than a thousand other lists 
which might be given, it was prepared by a very 
able man after considerable thought and inquiry. 
Certainly it is broad and comprehensive, and should 
appeal to any one who believes in a thorough dis- 
tribution of risk. 

' The More Profitable Way to Invest Money. 

The other class of investors believe in ^ ^selecting 
the best basket procurable, placing all of one's eggs 
in said basket, and then carefully watching the 
basket.'' It is, therefore, needless to say that many 
investors would scoff at the above list. Whether 
or not they are justified, is debatable; but it may 
be logical to eliminate the copper stocks altogether 
and possibly some of the pu.blic service corporation 
stocks. Public service corporation bonds should be 
highly regarded, and some day a large proportion 
of them will probably become municipal obligations 
in the cities in Avhich they operate; but the agita- 
tion and regulation of public service affairs now 
existing, although favorable to the bonds of many 
such corporations, is not favorable to the stocks. 
Therefore, many of the shrewdest investors are 
selling their stocks of public service corporations 
where the rates are regulated. 

Lighting companies, however, are not so severely 
harassed as traction companies. This is probably 
due to the fact that the greatest enemies of traction 
and other public service companies are their own 
employees. The men who operate lighting com- 



92 BONDS AND STOCKS 

parties know at all times just what service every 
customer is receiving in the form of light, and 
know that the light is - of the same brilliancy in 
every home in the city. The oiScers of a street 
railway company, however, do not know what their 
conductors and motormen are doing, and yet, the 
"public holds the officers responsible. In other 
words, the people come into closer personal contact 
with the street railway companies than they do 
with lighting companies, a condition much more 
favorable for the lighting companies. ^ 

It will also be noted that the Boston man, for 
some inexplicable reason, did not care to place any 
of his money in telephone stocks. He probably 
had some good reason for this, for some of 
the ablest i^Tew England investors are most heavily 
interested in the stock of the American Telephone 
& Telegraph Company. Although the supply of 
telephone securities seems almost unlimited, and 
although the government may some day take over 
these properties, yet now that the rapid growth of 
the "Independents" is reported to have been 
checked, the highest grade telephone securities 
should be attractive investments during periods of 
low prices. 

As a good illustration of the principle of con- 
centrating the risk upon one locality and one class 
of business and then watching the same, one may 
refer to the holdings of a well-known former 
United States Senator. Although this man must 
be very wealthy, yet he is reported to have his 
money wholly in the stock of three large corpora- 
tions, viz, : an important railroad company, a large 



DIFFERENT CLASSES OF CORPORATIONS 93 

industrial coinpauy and a great public service cor- 
poration. However, lie is a dli-cctor in all tJiree of 
tliese corporations unci thus most carefully icatclies 
his "haslcet of eggs." One need not be an United 
States Senator to have wealth or 'Svatcli the eggs 
in his basket," for there are many careful Xew 
England investors who follow the same method. 
They have their money invested simply in the 
stocks of some good railroad company or some good 
industrial company and a few other local corpora- 
tions ; but tliese men keep fully informed as to the 
status of these companies, their earnings, the 
market value of the stocks, and every item of news 
published concerning them. 

In fact, one investor in a town of Massachusetts, 
although having but a few shares of stock of one of 
the public service corporations of Massachusetts, 
sends to the State House every year for the official 
earnings of said company, and notes how these 
earnings compare with those of previous years, of 
which he has kept record. This man, although 
never having seen the property, is better informed 
as to its condition and growth than some of the 
directors of the corporation. He is a man who 
does not believe in shutting his eyes and mechanic- 
ally distributing his money among a large number 
of different classes of stocks on the ^^distribution of 
risk" theory, but rather believes in the selection of 
the stocks of a few corporations, and then keeps 
most careful watch of their progress. He buys 
more or he sells as he thinks the values are improv- 
ing or declining. By studying the sales as they 



94 BONDS AND STOCKS 

appear each night in his evening paper, he seems, 
by an almost supernatural intuition, to always 
know the sentiment on the Boston Stock Exchange, 
although he has not been to Boston for many years. 

Diversification. 

It doubtless is wise to distribute one's money 
among a fair number of investments ; but certainly 
it is not wise to buy anything which is not univers- 
ally considered absolutely good, even for the pur- 
pose of distributing the risk. It is much better, 
if possible with absolute safety, to buy a certain 
number of securities at one time, and then base 
one's buying and selling simply on the average 
price of this list, irrespective of the individual 
price of any one of the securities. 

More railroad stocks and less miscellaneous stocks 
than given in the above list should be purchased. 
With the above mentioned $100,000 to invest, in- 
stead of placing only $20,000 in railroad stocks and 
$80,000 in the stocks of miscellaneous corporations, 
half if not three-fourths might well have been in- 
vested in railroad stocks. Of course, many may 
object to this especially at a time when railroads 
are being harassed by the government, and their 
securities are in ill repute. This, however, is not 
a logical reason for not purchasing such stocks un- 
less as many tliinh, railroad securities will he in 
still worse repute some time later. It may be 
frankly stated that the best time to purchase good 
railroad or any other good stocJcs is when such stocl's 
are in disrepute, and there are more sellers than 



DIFFERENT CLASSES OF CORPORATIONS 95 

huijers. Therefore, altliongli it is not ahvaj's the 
time to buj stocks, yet the permanent investor 
should never refrain from purchasing because they 
are temporarily in ill repute // tJiey are^ at the 
same time, intrinsically good. 

In the book entitled ^'Business Barometers," 
there is given a list of the following ten stocks : 

Low 
Div. Price 

1907 1907 

Central New Jersey |8 114 

Chicago, Milwaukee & St. 

Paul 7 93 

Delaware & Hudson 9 124 

Great Northern plus 1 Ore. 

C€rt 7 144 

Illinois Central 7 116 

Louisville & Nashville .... 6 85 

New York Central 6 89 

N. Y., N. H. & Hartford. . 8 127 

Pennsylvania 7 103 

Pullman 8 135 

This list is selected, not primarily because it is 
believed to be a good list, but because it is a list, 
the records of which are available for a great num- 
ber of years. This list also represents those com- 
panies which have long dividend records. For in- 
stance, the Pennsylvania Railroad Company has 
paid a dividend every year since 1856, when it 
paid 8%. 

All of these companies are reported to have paid 
a dividend of some kind without exception during 
panics, periods of depression and periods of drastic 
rate regulation. It is perfectly proper to divide 
funds among the securities of these companies and 
others with similar records ; but going outside of 



96 . BONDS AND STOCKS 

the high grade seasoned securities simply for the 
purpose of distributing the risk, is a practice which 
is unnecessary. 

It should therefore be clearly understood that it 
is not so important whether you invest in the secur- 
ities of a railroad company or an industrial com- 
pany or a public service corporation, as it is to 
invest in the securities of some company which has 
a long record of honest management, steady growth 
and the payment of continuous dividends. There- 
fore, when deciding in what class of corporations to 
invest, endeavor to select ^Svell-seasoned" securities 
that have paid dividends on their stock through 
panics, depressions and all periods of anti-corpora- 
tion legislation. 



CHAPTEE VI. 

WHAT KIND OF BONDS TO BUY 

IT is well to explain at this point the difference 
between the various classes of bonds which are 
being offered, for the difference is very great. 
Before describing these various classes, however, it 
is important that the exact difference between stock- 
holders and bondholders be understood. 

A quotation from the Babson Instruction Courses 
on Investments which teach the underlying princi- 
ples of investments is here given. ^^Suppose a 
merchant oAvning property borrows $1,000. He 
gives his note promising to pay on a certain date, 
at a certain rate of interest, and gives a mortgage 
on his property as security for the loan and in- 
terest. IsTow the merchant, who owns the property 
and borrows the money, corresponds to the stock- 
holders of a corporation. The note secured by the 
mortgage, corresponds to the bonds which said cor- 
poration issues. The party luho loans the money 
corresponds to the bondholders, or the investors 
who buy the bonds. 

''Suppose a corporation owning a large property 
wants to borrow $500,000. The corporation makes 
a mortgage on all its property to a trust company, 
to be held in trust as security for all the persons 
who are to loan the money. The corporation then 
issues 500 bonds of $1,000 each, to a' total of 
$500,000, each bond promising to pay to the owner 



98 BONDS AND STOCKS 

of the bond $1,000 on a certain date, at a certain 
rate of interest, and stating that a mortgage has 
been made to a certain trust company as security 
for all the bonds and interest thereon. The bonds 
are then sold to investors. The stockholders, who 
own the property, and who authorize the $500,000 
to be borrowed, correspond to the merchant. The 
bonds, secured by the mortgage, correspond to the 
note. The bondholders, that is, the investors who 
purchase the bonds and who in doing so loan the 
money to the corporation, correspond to the party 
who loaned the money to the merchant. 

"A hond is a certificate of a corporation promis^ 
ing to pay the amount of the bond with interest, 
and in the case of a mortgage bond, states that the 
payment is secured by a mortgage. A share of 
stock is a certificate of the actual ownership of a 
certain portion of the property of a corporation. 
However, as most large corporations borrow money 
by issuing bonds and by mortgaging their property 
to secure the bondholders, a share of stock is only 
an interest in the property, subject to the mortgage 
of the bondholders, and an interest in the profits 
of the company, after the interest on the bonds has 
been paid to the bondholders. A bond is a certifi- 
cate held by a person who has loaned money to a 
corporation. A stock is a certificate held by a 
person who actually owns a portion of the business 
of the corporation. The bondholders loan the 
money. The stockholders, not as individuals, but 
on behalf of the corporation, promise to pay the 
money back, and mortgage the property of the cor- 



WHAT KIXD OF BONDS TO BUY 99 

poration to secure the payment. Wlien one buys a 
bond, the bond promises to pay back the face 
amount of the bond, and promises to pay interest in 
the meantime. A certificate of stock does not 
promise to pay any money at any time under any 
conditions. A bond is a certificate of indebtedness, 
whereas a stock is a certificate of actual ownership, 
or of interest. 

^^We speak of ^buying' a bond, but really when 
one buys a bond he does not 'buy' anything any 
more than one does when he deposits money in a 
bank. When depositing money in a bank, one 
'deposits' it there, and the bank makes an entry in 
a bank book showing the money has been received 
on deposit. When one invests in a bond, he ^loans' 
the money to the company issuing the bond, and the 
bond which he obtains from the company promises 
to pay the money back with interest, and the prom- 
ise, both as to the amount of the bond and the inter- 
est, is secured by a mortgage on the property of the 
corporation. When one buys a share of stock, he 
actually does ^buy' something. He buys an interest 
in the business of the corporation. When one buys 
a bond, he makes an investment in the strict sense 
of the word. When he buys a stock, he goes into 
business. 

''Many people think that stock is a certificate 
connected with a business in some way which enti- 
tles them to certain profits and they seem to have 
an idea that all they must do is to buy the stock and 
they are sure to get the profits and also to get a 
good value for the stock itself. Such is not the 



100 BONDS AND STOCKS 

case by any means. When one buys a share of 
stock, he buys an actual interest in the business, 
and he takes all the chances of success or failure. 
A bond rests upon the actual value of the property 
mortgaged to secure the bond, while stock depends 
for its value upon the success of the business. If a 
business is successful, dividends are paid on the 
stock, but if the business is not successful, there are 
no dividends, and the stock becomes worth little, or 
nothing. As to the bonds, if the business fails, the 
trustee will foreclose the mortgage and sell the 
property of the stockholders to pay the bondholders 
both the amount of their bonds and any interest 
which may be due." 

It will be seen, therefore, that given the same 
corporation, the bonds are safer than the stock. On 
the other hand, the stock of some corporations may 
be far safer for investment than the bonds of other 
corporations. Moreover, not only is there a great 
difference in corporations, but also in bond issues, 
and we will here discuss the different classes of 
bonds. 

Three Classes of Mortgage Bonds. 

^We will assume that a number of persons form 
a company known as the Great Eastern Railroad 
Company and issue stock, from the proceeds of 
which they receive money enough to buy the right- 
of-way for a railroad and grade the same. We will 
further assume that they wish to purchase rails and 
finish construction. Either they have sold all the 
stock which they can sell, or else they wish to avoid 



WHAT KIND OF BONDS TO BUY 101 

issuing more stock with the possibility of losing 
control. But — whichever the reason — they decide 
to issue bonds instead, and therefore the company 
mortgages these rights-of-way and the property so 
far as completed, to a trust company as trustee, and 
issues bonds secured by said mortgage. As this 
mortgage is the first which the company issues, 
these bonds are known as ''First Mortgage Bonds" 
and are secured by a first lien upon everything com- 
pleted at the time of their issue. 

^^We might now assume that this first mortgage 
has not been made large enough, and it is found 
that more money is needed to complete the property 
than was first anticipated. Therefore, it becomes 
necessary to place a second mortgage upon the prop- 
erty and issue other bonds. In such a case, these 
additional bonds are known as ''Secoiid Mortgage 
Bonds/' However, instead of this latter assump- 
tion, let us suppose that the company received 
enough from the sale of the first mortgage bonds to 
complete the property, and that the road is in 
successful operation with only first mortgage bonds 
outstanding. 

"Again, we will assume that at the end of five 
years the directors find an extension should be built 
to a city two hundred miles from the present termi- 
nus of the line. To pay for this extension, the 
company issues ''First Consolidated Mortgage 
Bonds'' said bonds being secured by a first mort- 
gage upon the extension of two hundred miles, and 
a second mortgage upon the original property, upon 



102 BONDS AND STOCKS 

which the first bonds mentioned above are a first 
mortgage. 

''We will again assume that this extension creates 
so much additional trafiic that it becomes necessary 
to double-track the entire road, and to do this the 
company must issue more bonds. These are se- 
cured by a mortgage upon the entire property in- 
cluding extensions, subject to existing mortgages. 
This new issue is thus secured by a second mort- 
gage upon the extension, and if the previous issue 
was a "consolidated" issue, by a third mortgage on 
the original property. Bonds secured by such a 
mortgage are known as ''General Mortgage Bonds/' 
Of course, given the same company with the vari- 
ous bonds above described, the first mortgage bonds 
are the best, the consolidated mortgage bonds next, 
and the general mortgage bonds are usually the 
poorest. This rule, however, cannot be applied 
when considering different companies, as general 
mortgage bonds of the Pennsylvania Railroad Com- 
pany or of the Reading Railroad Company should 
be absolutely good ; while the first mortgage bonds 
of some other corporations are practically value- 
less." 

A most forcible illustration of this fact is shown 
in the purchase of $5,000 First Mortgage Gold 5% 
Bonds secured by a first mortgage on a well built 
track and overhead wiring, l^ot only were these 
bonds a first mortgage, but they were purchased by 
a civil engineer who is supposed to be thoroughly 
posted on such matters. However, this civil en- 
gineer bought these bonds at about par from a 



^^TIAT KIXD OF BOXDS TO BUY 103 

reliable bond bouse wbicb bad previously purcbased 
tbem in good faitb. As nearly as can be ascer- 
tained tbese bonds are now quoted at about 5, 
wbicb means tbat for about $5,000 of tbis man's 
savings, be now lias only about $250 and moreover, 
this loss ivas caused hy the purchase of a first mort- 
gage bond. Of course, tbis illustration is an excep- 
tion to tbe rule, as probably not more tban seven 
per cent of tbe first mortgage bonds issued ever 
default; but since some do default, tbe small in- 
vestor sbould remember tbat it is not sufficient to 
insist simply on a ''first mortgage," as otber 
requirements are also necessary. 

Prior Lien Bonds. 

"At tbis point we will assume tbat tbis Great 
Eastern Railroad Company bas a serious setback 
and becomes temporarily embarrassed, so tbat it 
must raise more money or go into bankruptcy. It 
may be found tbat tbe. full autborized amount of 
"Consolidated Mortgage Bonds" bas already been 
issued, and it may be impossible to find a market 
under existing conditions for more General Mort- 
gage Bonds. As tbe property is intrinsically good, 
tbe bondbolders unite and agree to permit tbe issue 
of bonds wbicb sball take precedence as to security 
over all of tbe outstanding issues, including tbe first 
mortgage bonds. Sucli bonds are known as "Prior 
Lien Bonds/' It sbould be distinctly understood 
bowever, tbat tbese prior lien bonds cannot be 
issued witbout tbe consent of all persons bolding 
any of tbe otber bond issues. Tbese prior lien 



104 BONDS AND STOCKS 

bonds, however, are created to run for only a few 
years, or until the company again becomes prosper- 
ous, when they will be paid off and the prior lien 
mortgage discharged. The company in this case 
then resumes its former position, with only first 
mortgage bonds, consolidated mortgage bonds and 
general mortgage bonds outstanding. 

^^These are the principle issues which smaller 
companies have outstanding. Of these issues, the 
first mortgage bonds and the prior lien bonds are 
the safest and most attractive. The consolidated 
mortgage bonds may be attractive in this special 
instance, as they are followed by a large general 
mortgage issue ; but usually they are not considered 
conservative investments, especially when secured 
by new or unsettled properties. Moreover, general 
mortgage bonds are usually not considered con- 
servative investments unless the surplus earnings, 
after paying all taxes, rentals and interest on all 
issues, are at least equal to said charges." 

The following therefore is a very good rule ta 
follow : — 

^ 'Bonds which are followed by large equities, 
consisting of valuable junior bond issues or pre- 
ferred stock issues, representing large amounts of 
actual cash paid by other investors, are usually very 
good investments. In other words, it is wise always 
to keep in a ^'protected position" where other in- 
vestors ivill have so much money at stake that they 
will be obliged to save the property for their oivn 
protection^ and will in so doing protect the interests 
of the holders of all imderlying bonds. In such a 



WHAT KIXD OF BONDS TO BUY 105 

case, before the holders of the underlying issues can 
lose a dollar, a large number of other investors must 
lose their all. Such bonds are known as ^'Underly- 
ing Liens/' and are the class which are universally 
the safest. If a first mortgage issue is not followed 
by large equities either in the form of junior issues 
or full paid stock, it is not, even if correctly named, 
necessarily safe because it is a first mortgage issue. 
Therefore — the investor who desires only safety, 
should seek for underlying liens on old and success- 
ful properties. This is a very important rule to 
remember, but on the other hand such issues may 
very readily be obtained from any of the high 
grade bond houses. It is simply necessary to ask 
for ''an underlying lien" of the large railroad 
system*, and whether the issue recommended is a 
first mortgage, a second mortgage or a consolidated 
mortgage, it should be safe. 

Convertible Bonds and Extended Bonds. 

''There are, however, other classes of bonds, and 
to continue the illustration, we will now assume 
that it is a time of panic, that money rates are very 
high, and that simultaneously with these high 
money rates, additional funds are urgently needed. 
For good logical reasons from a banker's point of 
view, they (the bankers) will not purchase short 
term notes. In order to raise this additional money 
therefore, the company is obliged to issue ''Con- 
vertible Bonds/' Such bonds give the purchasers 
the privilege of exchanging, within a certain num- 
ber of years, their bonds for a certain number of 



106 BONDS AND STOCKS 

shares of stock in the company, if the holder so 
desires. The new bonds are issued to pay 5%, and 
at the same time, the stock is likewise paying 5%. 
There is, however, a prospect of the stock paying 
6 % or possibly 8 % , and this makes the convertible 
feature quite attractive. In other words, the pur- 
chasers of these new bonds have a b etter se curity^y^ 
than stock, and in addition^ have the privilege of 
converting their bonds into stock at any time that 
the stock should became especially valuable. This 
convertible bond issue is not, however, secured by 
mortgage. 

^^A short time later another issue becomes due, 
and as money rates are still high and the company 
does not wish to sell another convertible issue, it is 
necessary to pay this latter maturing issu.e in some 
other way. Therefore, the company extends the 
old bonds for a period of years by paying the cur- 
rent rate of interest. These latter bonds are known 
as ''Extended Bonds/'' 

Equipment Bonds, Terminal Bonds and 
Land Grant Bonds. 

^^We will now assume that it becomes necessary 
for this Great Eastern Railroad Company to buy 
more equipment, and a new bond issue is created 
secured by this new equipment. These bonds are 
known as ''Equipment Bonds/' Again, the com- 
pany desires to build a passenger station in 
Chicago, and purchases a tract of land and builds 
a station thereon. The money is obtained by creat- 
ing an issue of bonds secured solely upon the pas- 



WHAT KIND OF BONDS TO BUY 107 

senger station and the land upon which it stands. 
These latter bonds are known as ''Terminal Bonds/' 
Later, the company comes into possession of large 
tracts of land, and in order to build branches there- 
to for developing the property, issues some ''Land 
Grant Bonds/' These bonds are secured both on 
the branch railroad and the lands adjoining, and 
the bonds are reduced as the land is sold. All three 
of these classes of bonds have usually been safe and 
attractive." 

Eefunding Bonds and Other Classes. 

^'The company has now so many bond issues 
outstanding that it becomes desirable to consolidate 
all of the issues into one issue. The directors there- 
fore execute one large mortgage called a refund- 
ing mortgage upon the entire property which is 
sufficient to provide bonds that may be sold when- 
ever any of the other underlying bonds become due. 
As more underlying bonds become due, the security 
for these Refunding Bonds increases, for they are 
becoming secured by a first mortgage on more prop- 
erty. Eventually all of the underlying mortgages 
will mature, and the refunding mortgage w^ill be a 
first mortgage upon all of the property. This 
period, however, will not be reached until all of the 
issues above mentioned are either paid or exchanged 
for the Refunding Bonds. There are other classes 
of bonds, such as Income Bonds, Participating 
Bonds, etc. ; but space will not permit a description 
of these here." 

Some companies are not honest in naming their 



108 BONDS AND STOCKS 

issues and sometimes call an issue by a more 
attractive name in order to make it more salable. 
This means that one cannot depend entirely upon 
the title. This being the case, the investor cannot 
safely buy bonds simply because they are called 
''first mortgage bonds/' 'Not only are bonds such 
as the Toledo, St. Louis & Western Kailroad 4's 
due 1950 called "First Mortgage'^ bonds when in 
reality they are purely "Second Mortgage" bonds, 
but the names of roads are also misleading. A 
very simple illustration of this is the case of the 
"European & North American Railway" which, 
although its names signifies a transcontinental line, 
is a road only 114 miles long located between 
Bangor and Vanceboro, Maine. As the road is 
now leased by the Maine Central Railroad Com- 
pany, its securities should be absolutely good ; but 
it nevertheless serves as a very good illustration of 
the fact that the investor cannot depend upon the 
name alone. 

Therefore, even if a bond issue is said to be 
secured by a first mortgage on a property with a 
high sounding name, investors should investigate 
further, and reliable bond salesmen will gladly give 
all the information desired. In this way the in- 
vestor may learn whether or not both the corpora- 
tion and the bond are correctly named, especially 
if the explanation is accompanied by a copy of the 
mortgage and a map showing the location. There- 
fore, when investing in bonds, unless one is espe- 
cially trained or willing to leave the matter entirely 
with his banks and the bond house which his bank 



WHAT KIXD OF BOXDS TO BUY 109 

recommends, he sliould first decide in which of the 
above mentioned classes of bonds he wishes to 
invest, and then ascertain whether or not the bonds 
which he is considering are correctly named, and 
of what the security consists. 

Of the various classes of bonds above mentioned, 
the most interesting are ^^Convertible Bonds" and 
^^Eqnipment Bonds." There are now outstanding 
only a few issues of land grant bonds and terminal 
bonds, although both of these classes stand very 
high. Moreover, land grant bonds are constantly 
being paid instead of being refunded and are there- 
fore becoming more and more scarce, so that event- 
ually the large systems will have none outstanding. 

The reverse, however, is true of equipment 
bonds. A road may double track its property and 
reach a limit on such improvements, as the elimina- 
tion of grades, curves, etc., but it can never reach a 
limit on the amount of equipment needed. So long 
as the country grows, the railroads will continually 
need more and more equipment, and more equip- 
ment bonds will be issued. Many roads also are so 
heavily mortgaged already that a new mortgage does 
not now appeal to the investor even although the 
new mortgage be given for the purpose of acquiring 
equipment. Therefore, instead of placing another 
general mortgage on their properties, many com- 
panies issue equipment bonds secured by first mort- 
gage on the equipment purchased. It is probable 
that the greatest need of the railroads during the 
coming years will be for equipment, and the pur- 
chase of this equipment will be financed by issuing 
equipment bonds. 



110 BONDS AND STOCKS 

Debenture Bonds and Collateral Trust Bonds. 

We will now continue the above illustration by 
assuming that this same Great Eastern Railroad 
Company with bonds outstanding becomes very 
prosperous and commands a very high credit, while 
the directors desire to borrow money for a through 
system of block signals or something of a similar 
nature. They think, however, it is entirely un- 
necessary to place another mortgage upon the prop- 
erty, and therefore issue notes of the company, that 
is, plain ^^promises to pay" without security of any 
kind. These notes are known as '[Debenture 
Bonds." These are the character of bonds which 
the Boston & Maine Railroad Company and the 
E'ew York, ^NTew Haven & Hartford Railroad Com- 
pany issue and which, in the case of such roads, 
should be good ; but in many other cases — ^where 
preceded by rnortgage bonds — are undesirable. 

We will now assume that the company desires to 
purchase the stock of another railroad which is 
operating in adjoining territory. To do this, the 
company buys said stock and immediately deposits 
the same with a trust company and issues notes 
^^payable to bearer" in coupon form, secured by 
said stock. Excepting for the stock deposited, 
these notes have no more security than the deben- 
ture bonds mentioned in the preceding paragraph ; 
but owing to the collateral, these latter bonds, which 
are issued to buy the stock of the company operat- 
ing in adjoining territory, are known as ''Collateral 
Trust Bonds'' 

After buying the stock as above, let us assume 



WHAT KIXD OF BONDS TO BUY 111 

that the directors become desirous of purchasing 
the stock in another, but larger company operating 
in adjoining territory. Upon commencing to buy 
the stock in this second company, they find that the 
directors of another road are likewise endeavoring 
to buy the same stock, and in order to prevent forc- 
ing up the price to a prohibitive figure, the two 
companies unite, and each buys one-half of the 
stock (or rather buys the stock in common), and 
deposit said stock jointly with a trust company and 
issue joint notes secured by said stock. In reality 
these notes are simply Collateral Trust Bonds ; but 
they are signed by both companies instead of one 
company. Owing to this latter fact, they are 
known as ''Joint Bonds" 

Guaranteed Bonds or Assumed Bonds. 

Of course, both of these sub-companies, the stock 
of which was bought by the original company, have 
dependent bond issues outstanding. We will as- 
sume that one of them wishes to sell another issue 
for double-tracking. In order to help the sale of 
this new issue, the parent company guarantees it. 
Such bonds are known as ''Guaranteed Bonds/' 
lloreover, when the stock of a company is pur- 
chased, it is often agreed that if the sub-company 
should sell additional bonds, the bonds already out- 
standing will be assumed by the parent company. 
This is insisted upon by the stockholders of the 
smaller company before they agree to the sale of 
the property, as it often happens that the stock- 
holders also hold the majority of the bonds of the 



112 BONDS AND STOCKS 

smaller road. In such a case these old bonds are 
henceforth known as ''Assumed Bonds/' 

Of these various issues it will be seen that the 
last two are in reality but new names for bonds 
previously mentioned and are of the same general 
character, excepting that they are guaranteed by 
another company to aid in their sale. Bonds which 
should be safe without any guaranty, should when 
guaranteed be especially attractive, particularly if 
the guaranteeing company is prosperous and of long 
standing; but if not safe without a guaranty,, they 
should not be recommended as investments. For 
these reasons, inexperienced investors should be 
loath to purchase any of these three classes except- 
ing when issued by large and prosperous corpora- 
tions, the stocks of which are listed and actively 
sell at a premium. All debenture and collateral 
trust bonds should be most carefully studied before 
one invests therein. Regarding the other three 
issues; namely, debenture bonds, collateral trust 
bonds and joint bonds, given the same company 
with all three issues outstanding and with collateral 
of equal value, the ^^Joint Bonds" should be the 
safest and the ^^Collateral Trust Bonds" should 
rank next, as each of these issues have all the 
strength of the ^'Debentures" with the collateral in 
addition. On the other hand, a plain debenture 
bond of one company may be a very much safer 
investment than the collateral trust bond of another 
company. 

Moreover, some of the largest losses incurred by 
bond buyers have come from purchasing collateral 



\YBAT KIXD OF BOXDS TO BUY 113 

trust bonds secured by stock of companies where 
the first mortgage bondliolders have foreclosed and 
taken the property, this resulting in a total loss to 
the holders of the collateral trust bonds. Where 
the collateral consists of stock, collateral trust bonds 
are wholly junior to even the ^'Debenture Bonds" 
and to the floating debt of the controlled companies. 
This was illustrated in the case of the old Consoli- 
dated Steamship Company bonds, which were 
actively traded in at Boston a few years ago. These 
bonds were secured by stock of four important 
steamship lines operating on the Atlantic Coast, 
and were dependent for their interest charges on 
che dividends received from the stock deposited as 
security. As the four subsidiary lines were not 
obliged to pay dividends on their stock, this put the 
ownero of these 4% collateral trust bonds in a very 
awkward position. 

Moreover, when these bondholders pressed their 
claims and attempted foreclosure, they found that 
they could simply foreclose and take the stock but 
could not take the actual property, as the holders of 
the floating debt of these subsidiary companies 
came ahead of these collateral trust bondholders, 
and thus could dictate the policy. This resulted in 
a reorganization wherein the holder of $5,000 Col- 
lateral Trust 4% bonds received only one $1,000 
5% bond in exchange, which 5% bond is the one 
now quoted on the Boston Stock Exchange. 

Two Sides of All Issues. 

Those who are considering purchasing any of the 



114 BONDS AND STOCKS 

classes of bonds herein mentioned, should consider 
the following: Convertible bonds of established 
companies are usually very attractive when they 
are selling at a reasonable price and usually offer 
the greatest opportunity for profit; but also for 
loss. This is best illustrated in the case of con- 
vertible bonds of certain w^ell-known mining com- 
panies for which many stockholders paid around 
par and interest. These bonds are now selling at 
only a small fraction of the original cost, E'ever- 
theless, convertible bonds of well established rail- 
road companies are often very attractive; such 
special issues are usually secure and offer a good 
opportunity for profit. A writer once referred to 
a convertible bond issue as a "Balloon with a life 
preserver attached." Of course it is the balloon 
feature, namely, the privilege of sharing with the 
stockholders any large increase in the value of the 
stock, that makes convertible bonds attractive, 
although as a rule, stocks of companies having large 
convertible bond issues outstanding do not enjoy 
large increases in market price. However, nearly 
all convertible bonds of established companies show 
larger increases in price than almost any other class 
of bonds above mentioned. This increase is espe- 
cially large after or during a period of depression 
when stocks have been selling very low. 

On the other' hand, at the time of a drop in 
stocks, during or following a period of prosperity, a 
decline in convertible bonds is usually greater than 
that of almost any other class of bonds. Moreover, 
convertible bonds are usually only junior liens, and 



WtLlT KIXD OF BOXDS TO BUY 115 

in many instances, mere debenture bonds of the 
issuing companies. Tiieref ore, it is a general opin- 
ion among conservative bankers that, excepting the 
very best issues, such bonds should not be purchased 
bj the investor who does not study fundamental 
business conditions. Persons who prefer to pur- 
chase stocks are recommended to seriously consider 
convertible bonds ; but they -are not to be recom- 
mended to persons who now confine their purchases 
to the high grade bonds. 

Equipment bonds are attractive on account of 
the high yield. They are also usually well secured ; 
but the best equipment bonds run for only a short 
period, and this is one distinct objection. In a 
period when bonds are high, a wise investor pur- 
chases only short term notes of about two years 
duration, and in a period when bonds are cheap, he 
purchases long term bonds. Therefore, most in- 
vestors have little use for bonds running about ten 
or fifteen years, the usual duration of equipment 
bonds, as they do not answer the purpose of either 
short or long term oonds and usually mature at the 
very worst possible time from an investor's point 
of view. Moreover, the purchaser of equipment 
obligations should carefully consider the value of 
the equipment securing the issue, and always insist 
upon receiving a copy of the legal opinion which 
the firm offering the securities should have on file. 
The contract providing for the use of the equipment 
is public property, and is usually printed as a part 
of the indenture. With equipment bonds properly 
secured, each car or locomotive is plainly marked so 



116 BONDS AND STOCKS 

as to identify the mortgaged property, and tlie par 
value of the issue should not exceed 60% of the 
total cost of the equipment, although some of the 
larger roads issue equipment bonds up to 90% of 
the cost. There should also be proper provision 
compelling the company to maintain the efficiency 
of the equipment. In short, equipment bonds are 
similar to notes secured by a chattel mortgage on 
any other property. If the property has a good 
market value and can be sold and transferred and 
the legal work has been properly done, the notes are 
well secured and often the security is much prefer- 
able to real estate security; but unless these feat- 
ures are complied with, a chattel mortgage is unat- 
tractive. 



CHAPTEE VII. 

LISTED AXD UNLISTED SECURITIES. 

THE dealers of investment securities in Lon- 
don are divided into two classes, namely; 
the bankers or brokers who handle listed 
securities on commission, and dealers or merchants 
who handle the imlisted bonds. If occasion should 
arise to look up these investment houses in the tele- 
phone or business directory, it would be found that 
the banks dealing in the unlisted securities would 
appear as merchants in the same class as the wool 
merchants, dry goods merchants, tea merchants, 
etc. The banks dealing in the listed securities 
would be classified as banks or dealers in invest- 
ment securities. 

iN'ow this illustrates extremely well the differ- 
ence between the dealers in listed and the dealers 
in unlisted securities, although in this country 
there is very little distinction, as most reputable 
dealers handle both listed and unlisted. In Lon- 
don, however, the distinction is more closely drawn. 
For instance the bond merchant is allowed to adver- 
tise his wares, the same as the dry goods merchant 
and the tea merchant ; but the broker is forbidden 
to advertise in any such way. Xot only do the 
rules of the London Stock Exchange absolutely for- 
bid any newspaper advertising of any kind, but the 
London brokers do not send circulars to any but 
their regular clients. 



118 BONDS AND STOCKS 

How Bonds Are Listed. 

Bonds of large issues — especially on large rail- 
road companies — which have been outstanding for 
a sufficient time to acquire a wide market and in 
which there is trading almost every day, have grad- 
ually come to be '^listed." That is, the company 
issuing the bonds fills out an elaborate blank, which 
includes a description of its various classes of 
bonds with the amounts outstanding, together with 
an application to the 'Ne^Y York Stock Exchange 
to have the bonds listed. ^'Listed" means that 
they can be traded in by the members on the floor 
of the Exchange, and that quotations of the sales 
will be published by the Exchange, both in its offi- 
cial sheets and on the tape. Of course, the com- 
pany is obliged to agree to certain conditions and 
also to pay a certain sum of money ; but it gives a 
certain wide market and publicity to these issues, 
which is well worth the trouble and expense. 

Of course, when it comes to actual figures, there 
are many unlisted issues, such as the City of Boston 
bonds, for instance, wherein the trading and the 
market fully equal that of many of the listed issues. 
In fact, there are many listed issues which are not 
traded in oftener than once a month. E'everthe- 
less, there are certain individuals and institutions 
who will not buy bonds unless they are listed, and 
therefore to obtain their market certain large cor- 
porations arrange to have their issues listed as 
above outlined. 

This especially applies to foreign purchasers, 



LISTED AND UXLISTED SECURITIES 119 

and is well illustrated by tlie following : A repre- 
sentative of an xVmerican bond house in Amsterdam 
was in great haste to reach the cable office. He 
would not be delayed, saying that he had sold some 
bonds '^on condition that they were being listed on 
the New York Stock Exchange, as these Dutch in- 
vestors insist upon this.'' In short, he was cabling 
his E'ew York office to hurry an application. Said 
he, "Whether or not they are e\ er traded in on the 
Xew York Stock Exchange, I do not care ; but we 
must have them listed there in order to sell them 
here." This simply shows that some people lay 
great stress on listing a bond; however, listing in 
itself is not sufficient to provide a market. The 
main point to notice is whether or not the bond is 
actively traded in with a wide market, and with 
published quotations every day over a long period 
of time. 

Quotations and Rates of Commission 
on Listed Bonds. 

In the daily papers will be found a list of bonds 
which are listed on the New York Stock Exchange, 
and actively dealt in each day with the high and 
low prices of the day. Some daily papers, usually 
in the larger cities, have the complete bond sales for 
the day ; that is, instead of quoting 

low high 

Rock Island 4's 70 71 



120 BONDS AND STOCKS 

they will give the total sales of Rock Island 4's 
during the day, viz. : 

Rock Island 4's 2002 



10,000 @ 701 

5,000 @ 704 

10,000 @ 70 

2,000 @ 704 

For a complete list of the bonds listed on the 
'New York Stock Exchange with the last sales, one 
should refer to the official sheets of the ^ew York 
Stock Exchange which may be seen in any broker's 
office. It should be remembered, however, that 
there are two official lists published, one giving the 
sales for the day, and the other giving a complete 
list of the several hundred listed issues with the last 
sale, which may have been a month or even six 
months ago. 

On inactive listed bonds, some brokerage firms 
charge whatever commission they can get, or to use 
a railroad phrase, ^Svhatever the traffic will bear," 
one-fourth of one per cent, one-half of one per cent, 
or possibly one per cent or more. Firms which are 
not members of the New York Stock Exchange may 
charge whatever they wish on any bond issues, 
whether listed or otherwise. Firms which are 
members of the New York Stock Exchange, how- 
ever, should charge only one-eighth of one per cent 
on issues which are listed, while they may charge 
any rate which they desire on issues which are 
unlisted. One-eighth of one per cent is $1.25 on a 
thousand dollar bond. 



LISTED AXD UNLISTED SECURITIES 121 

Some persons look upon this as an advantage 
possessed by listed bonds. It is true that a firm 
will charge a commission of one-eighth of one per 
cent on a listed bond, and may demand a larger 
commission on an unlisted bond, but said firm will 
give much less thought and attention in aiding a 
customer who desires a listed bond. The extra at- 
tention received from bond firms which are not stock 
exchange members is well worth the extra commis- 
sion which one is sometimes obliged to pay such 
firms. In fact, one of the very best things which 
the ISFew York Stock Exchange could do to establish 
a more general interest in securities, would be to 
have a minimum commission of five dollars on a 
thousand dollar bond or ten shares of stock. Under 
present conditions a stock brokerage house cannot 
live without the speculative business, and it actual- 
ly entails a loss for them to develop a small invest- 
ment business. If, however, stock exchange firms 
could have the aid of the 'New York Stock Ex- 
change in developing such business, the policy 
would not only increase their clientele, but would 
cause a larger and broader interest in standard 
securities. This would eventually result greatly 
to the benefit of the dealers, the investors and the 
corporations of our country. Therefore, the chief 
advantage of listed bonds is not that they may be 
bought or sold for a small fixed commission, but 
they are preferable because they may be bought or 
sold at any time or — in other words — ^because there 
is always some market at some published quotation. 



122 BONDS AND STOCKS 

Why All Bonds are not Listed. 

Surprising as it may seem, only about five per 
cent of the bond issues outstanding today are listed 
bonds. In view of the above mentioned demand 
for listed bonds, the question naturally arises why 
all issues are not listed, and why all investors do 
not insist on buying listed bonds. The reason lies 
in the fact that the bond business is like any other 
business; when dealing with reputable firms, the 
purchaser receives what he pays for, no more and 
no less. If a firm gains only a small profit for 
performing a certain service, it naturally cannot 
give much time to the work ; but if the work can be 
made to yield larger returns, it will secure much 
more careful attention, not only because more is 
due to the customer, but also in order to retain this 
profitable clientele. One should use the same care 
in selecting a bond dealer as in selecting a physi- 
cian ; and for this reason, there is no doubt but that 
most investors get much better attention from the 
established dealers in unlisted bonds than from the 
average Stock Exchange firm which buys and sells 
only the listed issues. 

To illustrate this point. — When an investor de- 
cides to buy a listed bond, he usually must select 
the issue in which he intends to invest, and then 
give the order to a stock exchange firm for its 
brokers to execute in a mechanical way. If the 
investor has selected a good bond, the result is satis- 
factory ; but if the investor has not selected a good 
bond and has made a loss, it is final and he has no 



LISTED AXD UXLISTED SECURITIES 123 

complaint either legally or morally. The firm is 
simply required to execute the order, and if the 
purchase is a total loss, the brokers are not in any 
way to blame. 

If, on the other hand, the investor goes to an 
established firm and asks them to recommend a 
bond for permanent investment, this firm is willing 
to assume a certain amount of moral liability. 
Owing to this fact, therefore, such established firms 
usually give most careful attention to the selection 
of an issue for such an investor. For instance, 
before any of the large and established houses will 
become identified with an issue, it spends large 
sums of money for the services of engineers and 
attorneys, who make most careful examination of 
all details connected with the issue. These firms 
not only spend the money in the investigation of 
the issues which have been j)nrchased, but spend 
very large sums in studying many other issues 
which are never purchased. In fact, one of the 
partners of a large firm stated recently that his firm 
purchased bonds of less than five per cent of the 
properties which they examined, and that last year 
they spent nearly a quarter of a million dollars on 
engineering, legal work and other expenses con- 
nected with studying new issues. It will be seen, 
therefore, that such an organization is a great safe- 
gaiard to the permanent investor desiring only the 
highest rate of interest procurable with safety, and 
who does not care for a market in order to liqui- 
date. 

Xot only is it a great advantage to have the aid 



124 BONDS AND STOCKS 

of these firms in selecting an issue for purchase, but 
if anything goes wrong, these firms which original- 
ly offered the issue, will take charge of -the reorgan- 
ization and fight for the interests of their clients, 
the bond holders, to whom they sold the bonds. On 
the other hand, when buying a listed bond, the in- 
vestor often has no one to represent him impartial- 
ly. Although a ^'bond holders' committee" is 
always formed when the bonds are listed with no 
one house which feels responsible, the investor is 
not sure whether the committee is formed in the 
interest of the bondholders, the floating debt hold- 
ers, or the stockholders. In the case of high grade 
unlisted bonds, however, it is reasonably safe to 
assume that the firm which stood responsible for 
the issue is interested only in making that issue 
good, or in obtaining principal and interest for each 
bond holder. 

Dealers' Commissions on Unlisted Issues. 

It is impossible for these dealers in unlisted 
bonds to perform this work for the fractional com- 
mission, such as stock exchange firms receive for 
selling listed bonds, and experience has shown that 
such dealers are entitled to a profit of from five to 
ten per cent. In reality, therefore, this is a mer- 
chant's profit and not a commission. These dealers 
in unlisted securities go into the market and buy 
entire bond issues at wholesale, the same as the dry 
goods merchants buy cloth and the tea merchants 
buy tea, and then sell the bonds at retail. For 
instance, a large bond house would buy a million 



LISTED AND UNLISTED SECURITIES 125 

dollar issue for about nine hundred and fifty thou- 
sand dollars or possibly less, and then sell these 
bonds on some such basis as follows : 

Persons buying one bond are charged par and 
interest; and persons buying lots of twenty-five 
thousand can obtain them usually at a little dis- 
count. This is entirely just, for the firm can not 
afford to sell one bond for less than par; on the 
other hand, if the reader or any other wished to 
purchase the entire issue, he could purchase it at a 
very low figure. It is owing to this fact that these 
dealers in unlisted issues are considered in London 
purely as ^^merchants," while those dealing in listed 
issues are known as ^'brokers," and it seems that it 
would be very well to have the same distinction in 
this country. 

Usually the higher grade the bond issue, the 
easier it is to sell, and consequently the smaller is 
the profit to the bond dealer, and in many such 
cases, the gross profit does not exceed more than 
two or three per cent. On the other hand, the lower 
grade the issue, the harder it is to sell and the 
greater the commission ; in fact, some of the six per 
cent industrial and irrigation issues now on the 
market are said to give a gross profit of nearly 
twenty per cent to the dealers. Of course, there are 
two disadvantages connected with such issues, apart 
from the risk, viz. : First is the fact that there 
is less security for the bonds, less money having 
been paid in to the company's treasury from their 
sales, and consequently, one must take a much 
greater shrinkage if he desires to sell. Second, the 



126 BOINDS AND STOCKS 

fact that the greater the profit to the dealer, usually 
the greater shrinkage an investor must take if he 
desires to sell. 

The Leading Objection to Unlisted Bonds. 

When desiring to huj a listed bond, an investor 
is obliged to pay only a commission of one-eighth of 
one per cent, and likewise when selling said bond, 
the commission is limited to this amount ; but with 
unlisted issues this is different. Directly after 
purchasing an unlisted issue, it is often necessary 
to take a loss in case one desires to sell, and this 
loss is proportionate to the profit received by the 
dealer. Therefore, a very good rule to folloiv is 
to confine one's purchases of unlisted honds to such 
as are ivanted for a permanent investment, and not 
huy unlisted honds with the idea of selling them 
again at a profit. 

Eelative Advantages and Disadvantages. 

It will be seen from the above that both classes of 
bonds have their advantages and disadvantages. 
Actively traded-in, listed bonds are easy to buy and 
easy to sell ; but one must usually take his own 
responsibility when making a purchase. Unlisted 
bonds, although they are easy enough to buy, are 
often difficult to sell ; but when dealing with a good 
reputable house, the purchaser may feel that the 
firm's organization is not only selecting the issue 
with great care, but will also watch and protect it. 

Whether the weighing of these advantages and 
disadvantages results in favor of listed or unlisted 



LISTED AXD UNLISTED SECUHITIES 127 

issues, as a whole, it is difficult to say. Many of 
the keenest investors prefer listed bonds — but many 
equally informed prefer' unlisted. These advant- 
ages and disadvantages are apparently about evenly 
balanced, the advantage depending upon the indi- 
vidual need and purpose of the purchaser. The 
following is a good rule for the permanent investor, 
viz. : — 

WHEI^ BOiS^DS AEE LOW I^ PRICE AXD THE DE- 
MAND FOE jNIOXEY greatly EXCEEDS THE DEMAXD 
FOR SECURITIES, PURCHASE LISTED CORPORATIONS^ 
B0:N^DS, as IX THE TIMES OF PANIC, THE LISTED 
BONDS ARE THOSE SELECTED TO BE THROWN ON THE 
:\IARKET AND CONSEQUENTLY SHOW THE GREATEST 
DEPRECIATION IN PRICE. WHEN SELECTING A 
LISTED BOND^ HOWEVER, ONE SHOULD CONFINE HIS 
PURCHASE TO ONLY THE HIGHEST GRADE, AND 
REFUSE TO PURCHASE ANYTHING EXCEPTING THOSE 
QUOTED IN THE NEWSPAPERS EVERY DAY. 

ON" THE OTHER IIAND^ WHEN THE DEMAND FOR 
BONDS EXCEEDS THE DEMAND FOR MONEY^ THE PUR- 
CHASE OF HIGH-GRADE^ UNLISTED BONDS IS TO BE 
RECOMMENDED, AS WHEN TOO MANY PEOPLE WISH 
TO PURCHASE BONDS, THE PRICES OF LISTED BONDS 
ARE FORCED ABNORMALLY HIGH. MOREOVER^ WHEN 
PURCHASING SUCH UNLISTED ISSUES, INVESTORS 
SHOULD NOT EXPECT THE OPPORTUNITY TO RE-SELL 
THEM AT A PROFIT, AS THEY ARE FOR THE PERMA- 
NENT INVESTOR AND NOT FOR THE MAN WHO DE- 
SIRES TO MAKE A PROFIT ON" THE LONG SWINGS 
CAUSED BY THE VARYING DEMAND FOR MONEY AND 
OTHER SUCH FACTORS. 



128 BONDS AND STOCKS 

Fundamental Difference Between 
Stocks and Bonds. 

When purchasing a bond, jou purchase an obliga- 
tion of a company which matures at some definite 
date when the company must pay the principal and 
interest in full or you will have the privilege of 
foreclosing and taking the company's property. 
Owing to tliis fact, all good bonds when approach- 
ing maturity usually sell approximately at their 
par value. They do not sell much above their par 
value as an investor who holds a bond until matur- 
ity looses this premium. They do not sell miich 
below par as an investor will not sell a good bond at 
much less than par, because he is sure of obtaining 
the full par value when the bond matures. Of 
course, the longer the time a bond has to run before 
maturity, the greater usually is the premium or dis- 
count ; and conversely, the shorter the time a bond 
has to run, the smaller is the premium or discount. 

With stocks, however, there is a fundamental 
difference. When purchasing the stock of a rail- 
road or industrial company, there is, with feiu 
exceptions, only one luay in ivhich the money 
can he ohtained, and that is hy selling the stock 
to somebody else. Of course, it can possibly be 
sold to a broker, or by the broker, but the princi- 
ple is just the same because the broker must find 
someone else to whom he can sell it. In other 
words, when a bond is purchased, it is an obligation 
of the company and at a certain date, the company 
must pay the face value and interest, or go into 



LISTED AXD UNLISTED SECURITIES 129 

bankruptcy. When, however, the stock of a com- 
pany is .purchased, it represents only an equity in 
the company, and if nobody else wants it, it is 
absolutely impossible to obtain any money back, 
as the company is under no obligations to ever pay 
for the same. For this reason one should not only 
give much more thought and attention Avhen buying 
stocks than when buying bonds, but it is very im- 
portant that the stock should have a good ready 
market. It is also much more serious for the 
investor to hold inactive stocks, than for him to 
hold inactive bonds, for the following reasons : — 

(1) It is much easier to sell active or listed 
stocks than to sell inactive, unlisted stocks. As 
an investor may need to sell some of his invest- 
ments at any time, it is quite important that he 
should be able to do so. 

(2) It is very much easier to keep informed as 
to the standing and value of active, listed stocks 
than of inactive, unlisted stocks. As there is no 
obligation on the part of the company to purchase 
the stock at any given date or at any given price as 
in the case of bonds, it is necessary that the investor 
keep posted as to the value of his stock. 

Listed Stocks. 

Of course, intrinsically there is no reason why 
an unlisted stock should not be fully as good as a 
listed stock, and there are many unlisted stocks 
which intrinsically are better than many listed 
stocks ; hut all investors ivhen huying stocks should 
he advised to confiyie their purchases solely to 



130 BONDS AND STOCKS 

listed, active, high-grade stocks, unless desiring to 
invest in some local enterprise with the business 
and management of ivhich they are fully familiar. 
If a stock is listed, it is possible to always keep in 
touch with the value, and sell it before the loss 
becomes too great; but if the stock is unlisted, there 
is no way to keep in touch with the value, and one 
often does not know that anything has gone wrong 
until he finds the stock is absolutely valueless. 

Although some stocks listed on the E'ew York 
Stock Exchange are of little value, yet none of 
these stocks are issued or advertised in a fraudulent 
way or by misrepresentation. There are many of 
our large industrial companies, the stocks of which 
are listed on the !N'ew York Stock Exchange, and 
which sell for only $10 or $20 a share with a par 
value of $100. It is true that these stocks are not 
high-grade stocks and may not represent any actual 
value whatever other than good-will and voting- 
power. On the other hand, although the stock 
which sells at $10 a share may not be worth a cent 
more than $10 a share, nevertheless in many cases, 
it is worth the $10 a share at which it is selling 
simply for its voting-power, and the fact that it 
carries control of a vast industry. Therefore, 
although only the purchase of the high-grade, div- 
idend-paying, standard, listed stocks is to be rec- 
ommended; nevertheless, if one is determined to 
purchase a low-grade, speculative stock, he had 
much better take his chances by purchasing one of 
the active, cheap stocks listed on the ^ew York 
Stock Exchange than to purchase any of the inact- 



LISTED AND UNLISTED SECURITIES 131 

ive stocks advertised in tlie Sunday newspapers at 
$1 to $10 a share or at any other tLgure. Ninety- 
nine out of one hundred losses made by investors 
each day come from the purchase of stocks which 
are not listed on the Nev/ York Stock Exchange. 
New York Stock Exchange is cited, as a short time 
ago an advertisement appeared in one of the papers 
of a certain stock which was practically worthless, 
but at the bottom of the advertisement were these 
words : — 

^'This stock is a listed stock, thus assuring to the 
purchaser an active market." 

This particular ^^listed" stock was listed, how- 
ever, on an insignificant stock exchange in a small 
AYestern city. It is true that there are some out- 
side Exchanges such as the Boston Stock Exchange, 
the Philadelphia Stock Exchange, the Baltimore 
Stock Exchange and others which are operated in 
a high-grade way, the securities being scrutinized 
before being listed. With a very few exceptions, 
it is well for the average investor who buys stocks 
to confine his purchases to stocks listed and actively 
traded in on the New York Stock Exchange. 

Frauds Played on Investors. 

Avoid all unlisted, inactive stocks, especially 
those of new^ companies when advertised broadcast 
at a low price per share. As it is impossible to 
obtain with safety a net income of more than 4-1/2 
to 5% on good bonds, so it is impossible to obtain 
with absolute safety a net income of more than 
from 5-1/2 to 6 % on stocks. Whenever a stock is 



132 BONDS AND STOCKS 

advertised to net more than 7%, investors may rest 
assured that it is not an absolutely high-grade stock. 
As to these offerings of stock which net 8% or 10% 
and over, they should not be bought under any 
circumstances. 

It is true that we have thousands of propositions 
offered to us which promise to pay more ; but upon 
studying them, we find that there is some flaAV, and 
that it is unAvise to advise their purchase. There 
are a score of engineering offices throughout the 
country which are devoting their energies exclu- 
sively to the work of endeavoring to find proposi- 
tions which will safely pay more than 6%. These 
organizations throughout the country are working 
in the interest of men of large means, and for them 
are "scraping the country over with a fine tooth 
comb." 

In short, it is almost a miracle for any good 
proposition to "get by" one of these large engineer- 
ing organizations, whether it is a railroad or in- 
dustrial property, a mine or an oil well ; if it is any 
good and the stock will yield with safety more than 
a normal rate of interest for that class of invest- 
ment, all stoch ivill immediately he purchased hy 
these wealthy interests^ and none of it will ever he 
offered in the daily papers to the small investor. 
In fact, whenever the investor sees a stock of some 
new company offered in the daily papers to yield 
an abnormally high rate of interest, he may be 
reasonably certain that the property has been exam- 
ined by several large engineering or statistical 
organizations and reported upon unfavorably. In 



LISTED AND UNLISTED SECURITIES 133 

otlier words, when tlie small investor buys an un- 
listed, inactive stock, nine hundred and ninety-nine 
chances out of a thousand he is getting something 
which able men have looked into and have decided 
— after careful consideration — that they did not 
want. 

Work of Post Office Department. 

The good work which the Post Office Department 
is doing in trying to close up some of these dealers 
in illegitimate, unlisted securities, should be com- 
plimented. Our Postmaster-General is reported to 
have stated that the work recently accomplished has 
closed up seventy-eight of these dealers in such un- 
listed stocks during the year, and he assumes that 
"the swindling operations of these seventy-eight 
cases have filched from the American people in a 
period of five years, more than $100,000,000.'' 
One particular firm, according to the Government's 
memorandum, has been selling stock in more than 
two dozen companies. The same official document 
goes on to say : 

"It can safely be said that this firm has sold 
stock varying in value from ^40,000,000 to 
$50,000,000 in the various companies; it had an 
extensive suite of offices in the Platiron Building 
in JSTew York city, and at times had offices in Cleve- 
land, Chicago, Los Angeles and San Francisco." 

"In every instance, the members have promised 
large dividends on the stock sold, in addition to an 
increase in the value of the stock, but not in a 
single case have any of the companies paid any 



134 BONDS AND STOCKS 

dividends, and practically all of them have been 
complete failures." 

^^The department has received several hundred 
complaints from people who have bought this stock 
and lost their money." 

Startling Evidence in a Fraudulent Case. 

Examination of one firm's mail for the first 
three hours after the arrest of its officials gave 
startling evidence of the alacrity with which the 
public parts with its money in exchange for glitter- 
ing promises. In this one batch of mail alone, it 
is stated that the Post-Office inspectors found more 
than $20,000. The story, as told in the news 
columns of the 'New York Commercial, continues : 

^^And so slow is the ^come-on' to give up hope of 
50-per-cent dividends that while the inspectors were 
still busy gathering up the papers and books before 
locking the office door, many telegrams were re- 
ceived asking that shares in these properties be 
reserved for the simple-minded writers until money 
could be forwarded 

"The Post-Office people said that when this firm 
took parties to see their oil-wells, they always let 
them look upon real, spouting wells owned by some 
reputable company. The department has investi- 
gated all of the oil properties and has found them 
all to be worthless." 

"Besides spending some of their client's money 
in private car trips, they paid out considerable 
sums to such newspapers as would print their 
advertisements. When the raid was made, the 



LISTED AND UNLISTED SECURITIES 135 

inspectors found evidence that the concern had 
recently contracted for $300,000 worth of news- 
paper advertising." 

Comments of Leading Journals. 

In this stream of capital flowing through the 
mails into the coffers of fraudulent promoters, the 
^ew York Evening Mail discovers "one factor in 
the high cost of living to which due attention has 
not been given." 

"It helps to explain the circumstance that capi- 
tal, nowadays, fails to accumulate as steadily and 
as rapidly as it did some years back. All business, 
particularly the railroads, have felt the difficulty 
of securing the funds they require to enlarge their 
plant and make various betterments. In a sense 
the country seems to be living from hand to mouth 
— that is, it is spending about all that it makes, and 
has little left for anything beyond the routine 
needs. The operations of the get-rich-quick con- 
cerns show one of the ratholes — a big one — through 
which surplus capital disappears. 

"Other concerns using the mail are under inves- 
tigation, we are told, and other raids and arrests 
are to follow, the Postmaster-General having an- 
nounced that "the Government will drive from the 
country every wild-cat scheme to separate gullible 
investors from their money — so far as it is possible 
to do so." 

But how much depends upon that qualifying 
clause! Xote the Literary Digest, which quotes 
the ]^ew York Evening Woidd as saying : "What a 



136 BONDS AND STOCKS 

flurry would there be in Wall Street and in the 
highest financial circles were such an effort to be 
fearlessly, intelligently, and comprehensively 
made !" 

Therefore, although the stocks of a great number 
of our nation's most finely managed corporations 
are unlisted and very inactive, nevertheless the in- 
experienced investor should be advised against the 
purchase of any unlisted stocks which are publicly 
offered for sale to yield an abnormally high rate of 
interest. The holders of the above mentioned in- 
active stocks of our best corporations need, however, 
take no exception to this statement as it states, 
"Which are publicly offered," and their stocks are 
not publicly offered. When any stockholder desires 
to sell, the directors are always glad to pu^rchase 
said stock, and it is never publicly offered. More- 
over, no such stock probably yields more than 7 % 
at the outside. Therefore, those interested in 
legitimate, inactive stocks need take no offense 
although their stocks are unlisted. 

How to Obtain Information on Listed Stocks. 

The fact should be emphasized that because 
stocks are listed and actively traded in on the New 
York Stock Exchange, it is no reason why one 
should huy, or that they are a safe investment. 
Some of the greatest losses which have come to 
investors have been tlirough purchasing cheap stocks 
listed on the I^ew York Stock Exchange ; and there 
are probably several stocks listed thereon today 
which will be a loss to the holders thereof. 



LISTED AND UNLISTED SECURITIES 137 

Foreign investors especially have lost large sums 
of money through the purchase of the cheap, listed 
stocks of some of our large railroad and industrial 
corporations. The American purchaser has usually 
stood by the reorganization, paid his assessment, 
received new securities, and these new securities 
have in many cases become worth very much more 
than the old securities. The foreign investor, not 
knowing the great latent wealth of our country, 
refused to "spend a new dollar to save an old one." 
A holder of Union Pacific Common stock at the 
time of reorganization, who did not pay his assess- 
ment, suffered a total loss ; but those who paid the 
assessment and received new common stock, have 
made a most wonderful profit. The same Union 
Pacific stock which now sells at around $170 a 
share, sold at the time of the reorganization for 
about $8.00 a share; thus a man who had only 
$8,000 in Union Pacific at that time, would today 
have over $160,000 in addition to receiving $10,000 
each year as dividends ! In other words, the 
American has the optimistic disposition necessary 
to realize the growth of the country, and at the 
time of a reorganization, pays his assessments and 
stands by the property. Companies which are now 
barely earning interest cjiarges and whose common 
stocks are selling at very low figures may be re- 
organized, and tlie stock holders may be required to 
pay an assessment ; but such stock holders who pay 
the assessment and who stand by the property are 
almost sure to get back their money and make a 
handsome profit. On the other hand, this cannot 



138 BONDS AND STOCKS 

be depended upon^ and there will be some total 
losses ; in fact, onongli to reduce the average profits 
on the profitable ventures so that the investor in the 
cheap stocks will make no more in the long run 
than if he had purchased only the best. 

In justice to all, it is perhaps best to say also 
that it is a great temptation for investors to become 
panic stricken, refuse to pay the assessment, thus 
making a total loss. For this reason, the purchase 
of low grade speculative stocks should not be 
advised. Therefore, although listed stocks as a 
class have been spoken favorably of, yet it must be 
distinctly understood that because such stocks are 
listed it does not mean that they are absolutely 
good. 

An Object Lesson in Holland. 

If any one has any doubt of this, he should visit 
a large banking house in the Hague, Holland, the 
walls of one room of which are papered with value- 
less stock certificates of American companies, most 
all of which stocks were listed on the 'New York 
Stock Exchange. There is an old saying that, 
*^^You cannot beat the Dutch." This especially 
applies to the purchase of investments. The Dutch 
are very shrewd buyers aijd have probably made 
more money in the purchase of American stocks 
than any other class of European investors. The 
Dutch, however, when purchasing American stocks, 
confine their purchases to stocks which are listed 
and actively traded in on the New York Stock 
Exchange. It is much easier to interest all Euro- 



LISTED AXD UNLISTED SECURITIES 139 

pean investors in listed stocks than in unlisted 
stocks ; in Holland especially this is true. 

The well-known firm of Yon Oss & Co. of the 
Hague, has papered one of the rooms of its fine 
banking house with these worthless stock certifi- 
cates, as a constant reminder to its clientele that 
because an American stock is listed on the New 
York Stock Exchange, it is by no means a good 
purchase. It might be well for every public library 
in our land to have a similar room papered in a 
similar way, to keep the inhabitants of the city or 
village reminded of the necessity of buying only 
the highest grade, dividend-paying, standard stocks 
which have paid these dividends through periods of 
prosperity and depression, and have weathered 
every storm through which this country has been 
subjected. 

Of&cial Listing Notices. 

The best source of information relative to listed 
securities is the Ofiicial Stock Exchange Listings 
made up from data furnished to the Stock Ex- 
change by the proper ofiicers of the various com- 
panies whose stocks are listed. Listing require- 
ments will bear repeating. Before a company can 
have its securities listed on the Stock Exchange, it 
must prepare a detailed statement showing its con- 
dition and giving sufficient information to enable 
the committee to intelligently decide whether or 
not said securities are of real value. In addition 
to furnishing these original statements, the com- 
panies must furnish annual statements, thus giving 



140 BONDS AND STOCKS 

the Stock Exchange practically a yearly report of 
conditions and certain other information desired. 

In addition, however, to these statements, the 
Stock Exchange must be notified any time that new 
stock is to be issued, and in order to have the new 
stock listed, a new and complete statement must be 
prepared bringing up-to-date all previous state- 
ments. In addition to keeping the original records 
in the office of the Secretary of the 'New York Stock 
Exchange which is accessible to all members, dupli- 
cate copies are mailed to all firms who are members 
of the New York Stock Exchange. These firms 
methodically file these ^'Listing Statements in 
their local offices for the benefit of their clients and 
all investors who may desire official information. 

The next source of available information, is the 
actual yearly report of the company which may be 
obtained by writing the company direct. All com- 
panies whose stocks are listed on the l^ew York 
Stock Exchange issue printed reports, which reports 
are usually sent voluntarily to all stock holders and 
on request to any one writing for the same. More- 
over, all of the leading bond houses have these 
reports on file in their statistical department, and 
thus there is no excuse for an investor purchasing 
any listed security which is not strictly high-grade. 
If the investor lives in a small town and has no 
access to a brokerage office and cannot wait to send 
to the company for an official report, he should be 
able to obtain a detailed report at his local public 
library by inquiring for ''The Corporation Service 
Manual." Any investor who understands the 



LISTED AND UNLISTED SECURITIES 141 

imdei'ljing principles of investing can obtain 
valuable information from these reports. 

Up to the present time, the above were the only 
official sources of information for the small invest- 
or ; but since the new corporation tax law has been 
in vogue, which compels all corporations to file a 
statement at Washington, another source of in- 
formation is available. Although one cannot 
obtain access to the report of the company whose 
stock is unlisted and is not being publicly offered, 
unless he is already a bona fide stock holder, yet 
the Secretary of the Treasury has very properly 
ruled that the information relative to companies 
whose stocks are listed on the 'Rew York Stock 
Exchange shall be public property. Certainly this 
is very much to the credit of the Secretary, and he 
deserves the thanks and hearty appreciation of all 
investors throughout our land. 

Other Sources of Information. 

But these are not all the sources of information, 
as nearly all railroads publish their earnings 
monthly, and many publish their earnings weekly, 
all of which may be obtained from the brokerage 
offices through a definite Card System issued by the 
Standard Statistics Company in Xew York City. 
Immediately when any earnings or news items of 
permanent value become known, concerning any 
company whose stock is listed on the ^ew York 
Stock Exchange, this information is printed at the 
central office in Xew York on cards, (with a 
separate card for each item) and these cards are 



142 BONDS AND STOCKS 

mailed to the stock excliange firms and bond houses 
throughout the country every night. Upon receipt 
of them the next morning, the clerks in the respect- 
ive houses file them alphabetically, in a card index 
cabinet. Thus at any time, if a person desires the 
very latest information relative to a company whose 
stocks or bonds are listed on the ISTew York Stock 
Exchange, he has simply to go to his broker's office 
and ask to see the latest cards on said company, and 
this information is directly before him. 

In addition to this, there are numerous financial 
papers, and what is most interesting of all, the 
news ticker services, whereby information is sup- 
plied every minute during the day by an electric 
printing machine from a central office in E'ew 
York. Of course, these news tickers and financial 
papers do not make a specialty of listed investment 
securities, as in the case of the Card System above 
mentioned, but are designed more for the specula- 
tor than for the investor. 

Bureau of Misleading Advice. 

Up to the present point, we have referred simply 
to the source of actual information; that is, pub- 
lished facts, reports, earnings, financial notices, 
confirmed news items and other matters which are 
of practical and permanent value to the investor in 
aiding him to decide whether or not he should buy 
any stock in question. In addition to these, there 
are a vast number of periodicals, pamphlets, market 
letters and other publications, some sold and some 
distributed gratis, which propose to give analyses 



LISTED AND UNLISTED SECURITIES 143 

of securities for the benefit of bona fide investors, 
but which are not worth reading. In fact, invest- 
ors should shun many of these publications as they 
would shun smallpox, as many are designed to lead 
the investor astray. Of course some publishers 
claim that there is no difference between a legiti- 
mate analysis and a "write-up" ; but there is a 
great difference. In the former case, the writer 
has no personal "axe to grind" ; but, believing that 
he has some valuable information about some pro- 
perty of distinct interest to his subscribers, he 
prints the results of his study simply to increase 
the intrinsic value of his publication. "Write- 
ups," however, are given by publishers in exchange 
for money or for "calls" upon certain stock or for 
advertising or other purposes. 

Unfortunately, considerable of this work is com- 
mon, and the following statement by one publisher 
is probably true, "Well, if we didn't do it, the 
public would be obliged to pay us ten times as much 
for our papers as they do now." Granting, how- 
ever, that there are many men who would rather 
pay a small price and be fooled as to news, than to 
pay a large price for a reliable publication, yet, 
right is right, and all "write-ups" should be elimi- 
nated and the subscription prices adjusted accord- 
ingly. 

Manufactured Eiimors. 

Of all the illegitimate work of a financial editor, 
the very worst is the publication of known abso- 
lute falsehoods for their effect upon the stock 



144 BONDS AND STOCKS 

market ; and however guilty certain publishers may 
be for circulating purchased "write-ups," yet very 
few are guilty of intentionally publishing what 
they know to be out-and-out untruths. In fact, 
our well-known publishers use every effort to elimi- 
nate such matter from their work. However, not- 
withstanding their diligence, many manufactured 
rumors persistently appear in print and cause con- 
siderable loss either to buyers or sellers. 

Readers might also be warned against various 
cheap market letters and newspaper advertise- 
ments, especially such free advice as floats about 
most board rooms and brokers' offices. Advertise- 
ments of these miscellaneous organs may be found 
in Sunday papers, and should always be avoided. 
There is usually no source of such news at all, it 
being entirely manufactured under the direction of 
the person by whom it is distributed. In fact, it is 
said that many tipsters advise one-half of their 
clients to buy a certain stock, and the other half to 
sell it on the same day. All such tips should be 
avoided, for it is impossible for anyone to know 
how the market will act to-morrow or next week, 
or even next month. Long swings may be fore- 
casted by a study of fundamental statistics; but 
one stands a much better chance to make money at 
roulette or dice than by playing for a one per cent 
profit on the daily movement of any stock. 

How to distinguish between facts and "write- 
ups," or between legitimate rumors and manufact- 
ured tips is hard to explain as every one must 
depend to a certain extent upon his own intuition. 



LISTED AXD UNLISTED SECURITIES 145 

On the other hand, to be able to distinguish is very 
important in all instances, and absolutely necessary 
for those who are not willing or able to give a little 
time to definitely studying investments or who do 
not subscribe to the highest class of news services. 
Of course, both the honesty and the accuracy of 
every publication are generally known, and such 
reputation is common property which any one may 
learn by inquiring of their banks, brokers or bond 
dealers. 



CHAPTER VIII. 

SELECTING RAILROAD SECURITIES. (BONDS). 

ONE of the best informed men in America on 
railroad securities, a man brought up under 
Huntington, and later selected by Mr. Har- 
riman to take charge of an important division of 
his properties, after which he was selected b^^ lead- 
ing banking interests to be receiver of a large rail- 
road, and who today holds a most important posi- 
tion in railroad circles, states that he has not a 
dollar invested in railroad securities of any kind. 
Although all his life has been in the service of rail- 
roads, his investments are almost exclusively in real 
estate, which certainly might be the basis of a good 
"selling talk'' for those having real estate securities 
for sale! Nevertheless, he believes that next to 
municipal bonds, good railroad bonds represent the 
best form of personal investment, considering both 
yield and security. On the other hand, he bought 
real estate investments because, he said, "I have 
not time to study railroad investments, as they 
should be selected with great care." If this man, 
who is generally recognized as one of the greatest 
railroad men in the country, does not dare to pur- 
chase railroad securities for fear that he has not 
time to make the proper selections, it certainly 
behooves every investor to at least study the ele- 
mentary principles relating to their selection. 
Therefore, there should be emphasized some simple 
rules which should aid the investor in making such 



SELECTING RAILROAD SECURITIES 147 

a selection. In fact, if these underlying principles 
are thoroughly grasped and a careful study is 
pursued, there is no reason why anyone should not 
be able to select perfectly safe and attractive rail- 
road bonds for his personal investment. 

Four Kinds of Eailroad Bonds. 

■ In a preceding chapter, the different legal forms 
of railroad bonds were carefully described, showing 
the reader how to distinguish between first mort- 
gage bonds, consolidated mortgage bonds, refund- 
ing mortgage bonds, equipment bonds, terminal 
bonds, etc. We may refer to each of these different 
forms as a family, each having its own relation to 
its neighbors. Xot only does each family in a 
neighborhood hold a different position, but its chil- 
dren have entirely different characteristics. For 
instance, four boys in a family have certain funda- 
mental family traits; but each has his individual 
qualities. One of the boys is extremely conserv- 
ative; another is rather a general all around boy; 
the third is not so conservative nor so popular as 
the others, but he has a fine head and is generally 
considered the ablest boy of the family. The 
fourth, however, is an antithesis of the first. He 
is of a very nervous, uncertain and almost fool- 
hardy makeup. Xo one knows what he is to do 
next. He is always getting into trouble, although 
on the other hand he seems to have a happy faculty 
of always getting out again. He may bring great 
honors to the family name or great disgrace, and 
the chances are about even. 



148 BONDS AND STOCKS 

In the same way, every family of bonds has 
different members with different characteristics, 
and this especially applies to the railroad family. 
A family of railroad bonds consists of fonr members 
with different characteristics similar to those of the 
boys above mentioned. First, we have conservative 
railroad bonds such as those of old established lines, 
which have the same characteristics as the first boy 
mentioned above, and a very good motto is, ''When 
in doubt buy only these of the most conservative." 

Next, we have the inactive investment bonds 
yielding from four and one-half to five per cent, 
which are being continually offered by established 
bond houses of unreproachable character. These 
bonds have the same characteristics as the second 
mentioned all around boy. They are usually well 
secured, yield well and although often hard to sell, 
are very satisfactory permanent investments. In 
fact, for a person desiring to purchase bonds for 
income only, intending to hold same until maturity, 
such safe but inactive investment bonds are often 
the best kind he can buy. 

The next class corresponds with the third boy 
mentioned, — the one full of business. Such rail- 
road bonds are known as convertible bonds. Lastly, 
we have speculative bonds which compare with the 
fourth boy of our family. They may turn out well, 
or they may not, and it is Avell for the investor to 
let them alone. 

The Best Bonds to Buy. 

The conservative bonds first mentioned are usual- 



SELECTIXG RAILROAD SECURITIES 149 

ly underlying liens of large and established rail- 
road systems. These bonds should be absolutely 
good, and as safe as any government or municipal 
bonds. On the other hand, their yield is compar- 
atively small, usually not over four per cent, 
although some of these issues can be purchased on a 
basis to yield a little more. Inactive, investment 
bonds are usually the best issue on comparatively 
small or new properties. » Such bonds yield from 
four and one-half to five per cent, and nineteen out 
of every twenty are absolutely good and ultimately 
develop into high grade bonds of the first or 
conservative class. For one to invest a reason- 
able amount of money in such bonds is entirely 
proper, provided he has made a study of them and 
purchases them from the highest grade houses and 
insists that they properly fulfill the tests herein- 
after to be given. On the other hand, if one should 
invest all his money in such bonds yielding, say 
four and three-fourths per cent, he might eventual- 
ly lose enough of his principal to reduce the final 
net yield on his money to about four per cent, thus 
giving them no distinct advantage over the first 
mentioned class of highest grade bonds. 

Convertible Bonds. 

Regarding convertible bonds an authority writes : 
"Convertible bonds get their title from the fact that 
the holders have the right to convert them into 
stock of the issuing companies, in accordance with 
the terms as outlined in the mortgages or deeds of 
trust. Such bonds are usually direct obligations of 



150 BONDS AND STOCKS 

the issuing companies. Thej are payable at par 
on a specified date, bear a fixed rate of interest, and 
come ahead of capital stocks. In most cases, how- 
ever, they are junior to, or subject to underlying 
mortgages. The feature of convertible bonds mak- 
ing them so attractive to many investors is that 
they enable the holders to share in the general 
prosperity of the country. The evidences of the 
prosperity of railroads and corporations are growth 
of business and increased earnings, and these two 
things are reflected to a much greater degree 
through the enhancement of stock values than 
through the medium of any other form of security 
issue. It is therefore apparent that under certain 
conditions, holders of bonds convertible into stock 
may have a very valuable privilege. 

"However, in considering the purchase of con- 
vertible bonds, the same rules should govern as in 
the selection of any railroad or corporation bonds. 
That is, the privilege of converting the bonds into 
stock does not add to the security of the principal. 
The value of the conversion is due solely to the 
possibility of the stock selling at prices beyond the 
conversion figures. If the stock should not do this, 
the conversion privilege is without value to the 
holders. 

The main feature for the investor to remember 
about convertible bonds is as follows: — for those 
wishing to buy railroad bonds with the idea of sell- 
ing them again at a profit, good listed convertible 
bonds are the best kind to purchase. Convertible 
bonds fluctuate most in price; are most readily 



SELECTING RAILROAD SECURITIES 151 

bought and sold and have several advantages. On 
the other hand, men who are willing to ignore the 
yield and study fundamental business conditions 
in order to know when is the proper time to buy 
and sell, should give most careful consideration to 
listed, convertible railroad bonds. We will illus- 
trate a convertible bond issue by specific reference 
to the 3-1/2% convertible bonds of the Pennsylva- 
nia Eailroad. The principal of these bonds is 
payable October 1, 1915, and the coupons, repre- 
senting the 3-1/2% interest, are payable June 
and December 1st. The authorized issue is 
$100,000,000. The Company reserves the right to 
pay off the bonds at par and interest on and 
after December 1, 1910. These bonds are con- 
vertible into stock of the Pennsylvania Railroad, 
prior to maturity, at the rate of $75 a share for the 
stock, the par value of the stock being $50. 

"Therefore, based upon a par value of $100 a 
share, these 3-1/2% bonds can be converted into 
Pennsylvania Railroad stock at $150 a share. 
Assume that these bonds are now selling at about 
97, $970 for each $1,000 Bond. This makes a 
difference in the stock conversion figures, for the 
reason that if a $1,000 bond can be converted into 
stock at $150 a share, it is obvious that if the bond 
costs only $970, the conversion figure of the stock 
must be lower in proportion. Por the sake of 
illustration, assume that Penns.ylvania Railroad 
stock should sell at 165 for a full share prior to the 
maturity or the rederaption of the convertible 
bonds, and a holder who paid 97, or $970 for 



152 BONDS AND STOCKS 

a $1,000 bond, converted the same into stock. 
Based upon a $1,000 bond convertible into stock at 
$150 a share, he would get 6-2/3 full shares of 
stock. But his bond did not cost him $1,000. It 
cost him only $970 so he gets 6-2/3 full shares of 
stock based upon a lower cost as already explained. 
Therefore, with stock selling at 165, his 6-2/3 full 
shares are worth $1,100 representing a profit of 
$130 over and above the original cost of his $1,000 
bond at 97 or $970. 

Speculative Bonds. 

The speculative issues are usually new "Refund- 
ing issues," and are often not well secured. They 
may be compared with preferred stocks of medium 
grade properties. Such bonds are usually listed, 
and as long as they pay their interest, will yield 
about six per cent. Many of these issues event- 
ually prove of permanent value and gradually enter 
the class of high grade bonds, increasing in price. 
On the other hand, many of them eventually de- 
fault, the properties are reorganized, and the bond- 
holders may be obliged to accept a loss. There- 
fore, although such issues often present an opportu- 
nity for great profit, they give a like chance for 
great loss. Such issues as a rule are not secure; 
they fiuctuate greatly in price, and should not be 
recommended to the inexperienced investor. 

The Factor of Safety. 

The intelligent man is not content simply to take 
the opinion of others, but desires to study this 



SELECTIXG RAILROAD SECURITIES 153 

subject so that he may know how to arrive at a 
given decision, as to why one bond is safe and 
another is questionable. Therefore, after deciding 
which of the above four kinds of railroad bonds to 
buy, the first question naturally to be considered is 
the bonded debt per mile. In doing so one must 
ascertain the total amount of bonds outstanding of 
the issue under consideration, together with the 
total amount of other bonds wdiich come either 
before or on the same level with the bonds which 
are being studied. This is the proper way to make 
a theoretical analysis. For instance, when study- 
ing the convertible bonds of the Atchison, Topeka 
& Santa Fe Railway Company, one should consider 
the entire indebtedness of said road including the 
amount of these bonds, and the amount of underly- 
ing liens outstanding. This is because the average 
bond buyer not only wishes a bond, both the in- 
terest and principal of which will be paid, but he 
also wishes a bond of a company which will never 
go into a receiver's hands. Therefore, the simplest 
and most practical method for the investor to use is 
to consider the entire bonded debt. The first part 
of a report on such an issue, could be something 
similar to the foUow^ing: 

"xis shown in the company's report, on June 30, 
1911, bonds of the Atchison, Topeka & Santa Fe 
Ry. Co. were outstanding to the amount of 
$329,101,820 or at a total average rate of about 
$31,797 per mile of road operated, namely 10,350 
miles. Its fixed charges consumed only 12.9 per 
cent of the gross earnings, comparing with an 
allowable figure of about 16 per cent. 



154 BONDS AND STOCKS 

'Tor the fiscal year ending June 30, 1911, the 
total net income available for bond interest, rent- 
als, and other fixed charges, after deducting taxes, 
amounted to about $3,433 per mile, and these fixed 
charges amounted to about $1,368 per mile. There- 
fore, these fixed charges consumed about 39.9 per 
cent of said net earnings, leaving a margin of about 
60.1 per cent. The Atchison, Topeka & Santa Ye 
Ry. may be considered in that class where a margin 
of about 54 per cent is satisfactory. Therefore, 
all bond issues of this company may be classed as 
fairly conservative investments. 

^'Compared with 1910, the report for the year 
ending June 30, 1911, showing an increase in total 
net income per mile of about 0.8 per cent and an 
increase in fixed charges per mile of 1.6 per cent, 
which caused this margin, over and above fixed 
charges, to change from 60.5 per cent to 60.1 per 
cent. 

This "margin" above mentioned of 60.1 per cent 
is often called the ^'factor of safety" — or the 
amount which must be wiped out before the bonds 
are disturbed. It is the first figure for the bond 
buyer to hunt for. The reason for this is because 
the great inflexible factor which concerns every 
railroad operator is his road's fixed charges. The 
gross income can be increased by building up busi- 
ness, the operating expenses can be decreased by 
economizing; but the ''fixed charges," that is, the 
interest on the bonded debt, etc., is a fixed quantity. 
As long as the directors can pay their fixed charges, 
all goes well ; but the moment that the fixed charges 



SELECTING RAILROAD SECURITIES 155 

cannot be paid, a receiver is appointed and the 
bondholders assume the management. 

Fixed Charges. 

A railroad may cut do^vn on maintenance and 
cut expenses to the limit, but it must meet its fixed 
charges if it is going to keep away from a receiver- 
ship. Holders of bonds will insist on receiving 
their interest, and if the road has leased lines, rents 
must also be paid. Unlike an individual, a rail- 
road has not the alternative of moving ; hence these 
items — interest and rentals — are called fixed 
charges. They are definite predetermined amounts 
and should not vary much from one year to the 
next. ]\Ioreover, when they do vary, they usually 
increase instead of decrease. 

The investor analyzing the securities of a road 
must not consider fixed charges separately, but only 
in connection with the earnings available to pay 
them. The simple fact that road A has fixed 
charges twice as large as road B, does not mean that 
A's bonds are not as secure as B's. A's earnings 
may be twice as large as B's, and if A and B both 
spend the same proportion of gross on fixed charges, 
trafiic and transportation expenses, A will have 
more for maintenance and surplus. 

It is not safe to consider fixed charges without 
also considering the ratio of operating expenses to 
gross. The investor cannot set a definite per cent 
of net as a proper limit for fixed charges. An 
equal per cent of net consum.ed by fixed charges in 
each of two roads might mean a much larger per 



156 BONDS AND STOCKS 

cent of gross consumed in the case of one than in 
the other. A decrease in gross would then affect 
one much more seriously than the other. 

To sum up, small fixed charges do not mean 
much if the earnings are also small; an equal 
amount per mile may make much more of a hole in 
the earnings of one road than in those of another. 
The investor, lastly, should make sure that the 
figure for fixed charges is as small as it should be 
compared with the gross ; that the railroad company 
has included interest on all of its bonds; and is 
being well maintained. The point to remember 
here is ; — When selecting a railroad bond, buy one 
which has a large margin of safety — if possible 50 
per cent or more, that is, whose fixed charges do not 
consume more than 50 per cent of the net earnings 
nor more than 20 per cent of the total gross earn- 
ings. 

The first mortgage bonds of a company should 
come first unless there are special issues such as 
prior liens, receivers' certificates and sometimes 
first mortgage equipment bonds which may come 
ahead. Prior lien bonds are usually issued only 
for a short time and are issued by the consent of the 
present bondholders. The receivers' certificates are 
issued by the receiver, who has been appointed 
after a default on the payment of any of the obliga- 
tions of the company, and these may come ahead of 
the first mortgage bonds. " 

Certain first mortgage equipment bonds have, 
within the last few years taken priority over the 
first mortgage bonds, as it has been decided by the 



SELECTING RAILROAD SECURITIES 157 

courts that the equipment is a necessary part of the 
road, and without same, the road would be absolute- 
ly crippled. In the case of the reorganization of 
the Atchison, Topeka & Santa Fe in 1895, the court 
authorized the payment of interest and maturing 
principal of the equipment obligations, while other 
mortgage bonds were in default as to interest, and 
under the reorganization, all of the securities were 
either reduced in rate or refunded at a less amount, 
with one exception; while each $1,000 equipment 
bond was exchanged for $1,200 in general mortgage 
bonds. 

Second mortgage bonds, third mortgage bonds, 
etc. would follow the first mortgage bonds. Then 
usually come the consolidated mortgage bonds, the 
general and refunding mortgage, debenture bonds, 
collateral trust bonds, convertible bonds, notes and 
income bonds. It is also important that the invest- 
or should be able to ascertain approximately the 
equity back of any particular issue in which he is 
especially interested. This may be well illustrated 
by saying that the equity back of a first mortgage 
bond is equal to the market value of all the junior 
securities and the notes and stock of the company. 
If the consolidated mortgage bonds directly follow 
the first mortgage bonds, their equity is the market 
value of all the securities less their par value and 
the par value of the first mortgage bonds. 



CHAPTER IX. 

HOW TO READ A EAILROAD REPORT. 

Income. 

AFTER ascertaining the total bonded debt of 
a railroad and tlie fixed charges necessary 
to pay the interest on said debt and keep 
the railroad out of receivership, the next important 
question refers to the income available for paying 
said fixed charges. Therefore, to continue our 
illustration, in the case of the Atchison, Topeka & 
Santa Fe Rj. Co., a report thereon would read 
somewhat as follows: — 

^^The gross income of the property for the year 
ending June 30, 1911, amounted to $107,565,116 
or about $10,393 per mile. The growth of these 
earnings since 1900 is sho^vn as follows: — ■ 



Year 


Total Gross 


Per Mile 


Total Net 


Per Mile 


1900 


$46,232,078 


$6,297.49 


$18,977,399 


$2,585.12 


1901 


54,474.823 


6,977.41 


22.544,434 


2,887.72 


1902 


59,135.086 


7,527.97 


26,366.675 


3,356.67 


1903 


62,350,397 ■ 


7,827.92 


25,231,280 


3,167.77 


1904 


68,171.200 


8.334.31 


27,197,943 


3,324.93 


1905 


68,375.837 


8.232.70 


23.672,355 


2.850.37 


1906 


78,044.347 


8,828.01 


31,774,665 


3,471.50 


1907 


93.683,407 


10.102.65 


33,111,966 


3,571.00 


1908 


90.617.796 


9,624.82 


27,221,147 


2,891.00 


1909 


94,265.717 


9,624.00 


34,913.678 


3,564.00 


1910 


104,993.195 


10.588.00 


33.775.011 


3,406.00 


1911 


107,565,116 


10,393.00 


35,529,623 


3,433.00 


1912 


107,752,360 


10.139.00 


34,842,671 


3.278.41 


1913 


116,896,252 


10,874.00 


37.107,189 


3,451.73 



In the above table, two kinds of income are 
referred to; viz., gross income and net income. 
Most railroads receive their income from four 
sources; first, passengers; second, freight; third. 



HOW TO READ A RAILROAD REPORT 159 

dividends and . interest from securities held; and 
fourth, from miscellaneous sources, such as adver- 
tising, telegraphing, expressage, etc. It is always 
desirable to buy securities of roads which have 
shown a continual increase in both gross and net 
earnings. Moreover, this increase is better repre- 
sented in earnings per mile. The road which 
obtains greater gross earnings simply by increasing 
the mileage is not growing ; but if the earnings per 
mile of road are increasing, and especially per 
share of stoch outstanding , such a road is growing 
in a healthy manner. Therefore the gross earnings 
should first be considered when selecting a railroad 
bond. 

However, the bondholders ultimately are not so 
much interested in what the conductors and freight 
agents collect, as in what the treasurer 'has left 
after all bills have been paid. This remaining 
money is known as the '^net earnings," which 
amount is the gross earnings less the operating 
expenses ; or technically the gross earnings less the 
operating expenses plus ''other income'' as the 
above report includes among the earnings, receipts 
other than from strictly transportation. 

Another term often used in reports on railroad 
bonds is the "'operating ratio" Avhich is the per- 
centage of the operating expenses to the gross earn- 
ings. Most investors give too great importance to 
this operating ratio. One road will report an 
operating ratio of fifty per cent and another of 
sixty per cent, and the investor jumps at the 
assumption that the bonds of the road whose ex- 



160 BONDS AND STOCKS 

penses are only fifty per cent of the gross receipts 
are much better to hold than those of the road 
where sixty per cent of the gross is being spent on 
operating expenses. This is often a great mistake 
as the operating ratio or the ratio which expenses 
bear to gross earnings has very little significance. 
All depends upon how much the two roads spend 
respectively on maintenance. An increase in main- 
tenance costs may serve to reduce the net cost of 
transportation. If the road operating for fifty per 
cent has a similar traffic and territory and is spend- 
ing as much for maintenance, then such a road is 
being more efficiently operated, but otherwise not. 
One may readily realize that the road spending 
sixty per cent on operating expenses may be 
putting back into the property a much larger 
amount Joj renewing ties, changing to heavier rails, 
building stronger bridges, etc., than the first men- 
tioned property and if so, it may be much better 
for the investor to hold securities in the road with 
an operating ratio of sixty per cent. 

If all roads were located in the same territory, 
and had the same character of traffic, it would be 
possible to ascertain the proper percentage of the 
gross earnings required for maintenance ; but this 
is now very difficult. All depends on the territory 
and the character of the traffic. Western and 
southern roads with gross earnings of from $0,000 
to $7,000 per mile should expend almost twenty- 
five per cent of the gross earnings for maintenance ; 
but with large eastern roads having gross earnings 
per mile of $20,000, an expenditure of from fifteen 
to twenty per cent should be satisfactory. 



HOW TO READ A RAILROAD REPORT IGl 

Operating Expenses. 

Operating expenses are usually divided into five 
headings, viz. : — 

(1) Transportation Expenses 

(2) Traffic Expenses 

(3) General Expenses 

(4) Maintenance of Waj^ and Structures 

(5) Maintenance of Equipment 

Tlie items to be charged to these ^ve different 
accounts have been prescribed in detail by the 
Interstate Commerce Commission. The law relat- 
ing to these methods of accounting went into effect 
July 1, 1907, and the railroad reports based on the 
same, commenced with the fiscal year ending June 
30, 1908. Instructions may be obtained from the 
Interstate Commerce Commission explaining in 
detail each of these -Q-ve items ; but briefly they are 
as follows: — 

(1) Transportation expenses include wages of 
engineers, firemen, trainmen, flagmen, yardmen, 
clerks, and all station and other employees. Trans- 
portation expenses also include the cost of coal and 
other fuel, oil and water supplies, telegraph and 
other services. They include furthermore, all 
losses for damages and similar items. 

(2) Traffic expenses include wages of officers 
and other employees directly in charge of traffic, 
such as passenger, freight, baggage and other 
agents, including advertising expenses and certain 
expenses connected with the operation of fast 
freight lines, etc. 



162 BONDS AND STOCKS 

(3) General expenses include the salaries of 
the president, vice-president and other general 
officers, together with their clerks. Also attorney's 
expenses, insurance premiums, and other items 
which cannot be charged to any one of the other 
four divisions are included under this third head 
of general expenses. 

(4) Maintenance of way and structures in- 
cludes expenses for renewals and repairs of road 
way and track, including ballasting, repairs of 
bridges, culverts and switches, as well as shops and 
buildings. In short, the renewal or repair of 
anything that is immovable is charged to the main- 
tenance of way and structures. 

(5) Maintenance of equipment includes ex- 
penses for the renewals and repairs of locomotives, 
passenger cars, freight cars and other equipment, 
including water equipment if the company operates 
any steamships, tugs or barges. 

Now, what the reader should remember is that 
the amount of expenditures which come under the 
first three headings is wholly obligatory and de- 
pendent upon the mileage, volume of business and 
the efficiency of operation. The road whose pro- 
portion of gross expended on these first three items 
is the leasts usually represents the highest efficiency 
of management, and if the operating ratio included 
only these three items, it would be worthy of care- 
ful consideration. It is well, however, to look into 
these items separately. 

Practically the total expenses as reported also 
include items four and five which are subject to the 



HOW TO READ A RAILROAD REPORT 163 

control of the board of directors. If the directors 
wish to make a good showing, that is, have a low 
percentage of operation and a high percentage of 
net earnings, they can economize on items four and 
five and '^skin the road," to use a popular phrase. 
On the other hand, a road with small net earnings 
may be spending a large amount of money on items 
four and -Kve, and consequently be in a much 
stronger position. Therefore, when examining the 
operating expenses of any company, it is very 
necessary to analyze said expenses, and note how 
liberal the management is relative to the amount 
spent on maintenance. 

Transportation, Traffic and General 
Expenses. 

These are the first expenses which a road must 
pay. The average man having a mortgage on his 
house feels that the interest on said mortgage is 
the first expense which he must meet, and certainly 
this interest must be paid before he can set aside 
any permanent savings or purchase automobiles 
and other luxuries. On the other hand, the family 
must be fed even before the interest is paid on the 
mortgage; and thus a railroad must pay for its 
labor, coal and oil before it even considers the pay- 
ment of interests on its bonds. 

The investor, however, need not consider these 
first three headings independently, but lump them 
together and consider the percentage of gross earn- 
ings spent for transportation, traffic and general 
expenses. When this percentage is obtained and 



164 BONDS AND STOCKS 

the percentage of gross required for fixed charges, 
then the percentage remaining can be nsed either 
for maintenance or dividends. Of course, there 
are other important factors such as ^ ^engine and 
train mileage/' ^^car and train loading," ^^engine 
and train mile cost and earnings" ; but these cannot 
be considered here. Experts state that on averag- 
ing all railroads of the country, the expenses com- 
ing under these three items have consumed less 
than forty per cent of the total gross earnings. If 
twenty per cent has been consumed by fixed 
charges, this may mean a forced expenditure of 
sixty per cent, leaving a surplus of about forty per 
cent, all of which may be used wholly for dividends, 
or part may be put back into the property, which of 
course, is a more conservative method. 

The principal point to remember regarding these 
items is that, with two roads doing a similar busi- 
ness, if one consumes for operation a relatively 
larger percentage of gross than the other, it means 
one or both of two facts ; ^^either that with relative- 
ly like rates for the work performed, one road is 
not conducting its business with the same degree of 
economy as the other, or that, with like relative 
economy in the conduct of its business, the rates 
received by it for work performed are relatively 
smaller." The authority for the above statement 
illustrates the same by calling attention to the fact 
that the Chicago, Milwaukee & St. Paul Railway 
Company, (which by the way has extended its line 
to the Pacific Coast) and the Chicago Great West- 
ern Railway Company has had (until recently) a 



HOW TO READ A RAILROAD REPORT 165 

similar character of business ; yet these three items 
of expense during a term of years have con- 
sumed an average of about fifty per cent of the 
Chicago Great Western's earnings compared with 
only forty per cent in the case of the St. Paul's. 
This, therefore, means that the St. Paul, owing 
either to its physical condition or the character of 
its management, was then operated much more 
economically than the Chicago Great Western, and 
investors who took the trouble to look this up were 
forewarned against purchasing the securities of the 
latter, and consequently did not get caught at the 
time of the recent receivership. 

When looking over a list of roads, one should 
carefully consider the percentage of gross earnings 
which the given road is required to use for the pay- 
ment of these first three items and its fixed charges, 
knowing that what remains can be used for either 
maintenance or dividends, and is the real margin 
of safety over and above the actual expenses and 
interest charges. For this and other reasons, the 
bonds of a railroad ivith the greatest margin of 
safety should he the safest to huy. 

Maintenance Expenses. 

Up to the present point we have considered only 
fixed charges and actual expenses ; thus leaving two 
main items to discuss ; one, "maintenance," and the 
other, "surplus left for dividends, etc.". The great 
weakness of most American railroads today is the 
small percentage charged to maintenance. It is 
true that a large sum is spent upon maintenance, 



166 BONDS AND STOCKS 

but there is a vast difference between spending 
money upon maintenance and charging it to the 
maintenance account. For instance, every month 
or so, an office manager may purchase a new type- 
writer for the business; but he should not charge 
this amount to "capital account" ; but rather 
simply to "operating account" as a part of the 
maintenance expenses. Most of our railroads, 
however, when purchasing a new locomotive im- 
mediately charge the same to capital account and 
not to maintenance and operation. This is becom- 
ing a very serious problem, and the most unfortu- 
nate part of it is that these roads are said to be en- 
couraged in this by the authorities at Washington. 
These authorities, in order to please the public and 
force lower rates, are urging the roads to show as 
large a percentage as possible for dividends instead 
of encouraging them to charge everything possible 
to operation. 

Of course, one may be over-pessimistic, but it 
seems that the present method of rolling up these 
huge bonded debts and making no provision for the 
same is absolutely wrong. It is true that the 
average bonded debt can probably be refunded 
when due ; but there is a limit to everything, and 
such a hope cannot be banked on indefinitely. 
When one considers that many of our large rail- 
road systems have increased their debt two or three 
hundred per cent during the past ten years, it 
fairly makes one shudder. If these roads will 
stop at once, there will be no trouble ; but this rate 
of increase cannot long continue, and the only 



HOW TO READ A RAILROAD REPORT 167 

remedy is either to stop making improvements on 
these roads, or else charge said improvements to 
operating expenses and raise the rates correspond- 
ingly. The latter method should be adopted for 
who would not much prefer to pay 2-1/4 cents per 
mile to ride over a 100 pound, double tracked, rock 
ballasted road with safety signals, than to ride over 
a road with 60 pound rails, single track and with- 
out modern safety appliances at two cents per mile ? 
In short, most roads in the United States with a 
continuance of the increase in earnings which they 
have averaged during the past few years can main- 
tain their properties and pay interest on their 
•bonds ; but there are many railroads which cannot 
do this and pay dividends on its stock in addition. 
As, however, the average stockholder is human, he 
urges the directors to pay dividends and ^^trust to 
luck" for maintenance. 

Maintenance of Way. 

In ascertaining whether the proper amount has 
been spent on maintenance of way, one should first 
divide the total expenses by the mileage and ascer- 
tain the amount spent per mile. Of course, when 
an expert is preparing a detailed report, such 
figures are checked by ascertaining the amount 
spent on maintenance per '^one million ton miles 
carried" per mile of road, as the amount of traffic 
is an important factor. Also the territory in which 
the road operates is an important consideration, as 
more per mile should be spent on a mountainous 
road such as the Denver & Rio Grande than on a 



168 BONDS AND STOCKS 

level road, such as the Illinois Central Railroad. 
One should also consider the possibility of obtain- 
ing material, — that is, whether gravel, rock ballast 
and other supplies are immediately adjoining the 
property or must be hauled a long distance. One 
road for instance, may spend only $750 per mile 
for maintenance of way, and yet keep its property 
in better condition than another road spending over 
$1,000 per mile. 

It is plain that a road with considerable double 
track should require a larger expenditure per mile 
of road, as technically ^^per mile of road" refers t<:> 
the road bed and does not consider whether it con- 
tains only a single track as across the Arizona 
Desert or a four-track line as between I^ew York 
and Pennsylvania. In short, experts state that 
when a railroad's maintenance of way expenses 
average below $800 per mile of track, the investor 
should purchase only old, underlying liens or else 
carefully examine conditions. Other experts claim 
that Southern and Western roads are justified in 
spending only from $900 to $1,100 per mile of 
track for maintenance, while the large Eastern 
trunk lines are justified in limiting their expend- 
itures per mile of track (not per mile of road) to 
$1,300 or $1,400. 

Maintenance of Equipment. 

Maintenance of equipment figures are also given 
on a per mile basis, but this is of very little practi- 
cal benefit ; and Floyd W. Mundy, an authority on 
this subject, states as follows : — 



HOW TO READ A RAILROAD REPORT 169 

"Comparison of the maintenance of equipment 
expenses per mile of road avails little. The best 
basis for testing the efficiency of these is to ascer- 
tain the average amount expended on equipment 
per unit of service rendered by the equipment ; that 
is, the average outlay per locomotive per mile run, 
per freight car per mile run, and per passenger car 
per mile. Maintenance of equipment depends not 
alone upon the amount of equipment to be main- 
tained, but also upon the service rendered by the 
equipment. It stands to reason that the Erie Rail- 
road, for example, with a freight density, as of 
1911, of 3,013,502 ton m_iles and a passenger den- 
sity of 267,749 passenger miles per mile of road, 
must expend more per mile of road for ^Main- 
tenance of Equipment' than the Atchison, with a 
freight density, that same year, of 674,538 ton 
miles, and a passenger density of 122,616 passen- 
ger miles per mile of road. 

"An example which tends to establish that equip- 
ment maintenance has necessarily no relation to 
gross earnings. Suppose the tonnage of one road 
consists altogether of low class freight, as coal or 
iron ores, and the tonnage of another road wholly 
of high class freight. Each road earns $18,000 
per mile. The density of the first road's traffic, 
and as a consequence, the service rendered by its 
equipment, must be far greater than that of the 
second road. The business of the one road might 
be successfully conducted with one-third of the 
equipment and power required by the other. 

"It may be said that under present conditions 



170 BONDS AND STOCKS 

about 5-1/2 to 6-1/2 cents per locomotive psr mile 
run, 5 to 7 mills per freight car per mile run and 
1-1/4 cents per passenger car per mile run repre- 
sent fair annual outlays for equipment mainte- 
nance, or that an average of $2,000 to $2,500 per 
annum per locomotive, $55 to $65 per annum per 
freight car and $650 per annum per passenger car 
approximate normal mainteinance jequiirements. 
All this depends much upon the character of equip- 
ment required in the service, locomotive mainte- 
nance sometimes going as high as $5,000 per an- 
num, freight car $500, and passenger car $2,000. 

''There are many roads where, although main- 
tenance both for roadway and equipment is 
clearly surcharged, the extent of the excess of 
maintenance over normal requirements cannot be 
taken as present earning power. Take again, for 
example, the Erie or Atchison as distinct from 
some higher grade railroads. While some higher 
grade railroads may not report a surplus much 
in excess of dividend requirements, yet the divi- 
dends appear secure for the reason that when 
there comes a bad year, there is, and for years 
has been, abundant opportunity for curtailment 
of maintenance expenses. After reorganization, 
the properties of the Erie and Atchison were 
turned over to the new managers in a deplorable 
physical condition. Here the needs were so 
unusual as to make imperative, extraordinary 
charges to operating expenses for maintenance. 
The excess of these expenses over normal 



HOW TO READ A RAILROAD REPORT 171 

requirements could be considered only as offering 
opportunity for future retrenchment. It could in 
no way be taken as an immediate margin of safety. 
Following the rulings of the Interstate Commerce 
Commission, a majority of the railroad companies 
charged to 'Maintenance of Equipment' during the 
last fiscal year amounts for depreciation varying 
from six per cent to one per cent and less. From 
even a casual examination of the railroad reports 
for the past fiscal year, it is apparent that until 
the Commission shall specify the exact rate to be 
charged on account of depreciation of equipment, 
the desired result for which the law was enacted 
will not be attained. 

For those who want to study this subject so as to 
be able to select their own railroad investments, 
the suggestions in this and in the previous chapter, 
are none too exhaustive. This analysis, of course, 
requires time and study. 
/Tin short, the purchaser of railroad bonds should 
first ascertain the fixed charges, the relation of said 
fixed charges to the total net income, and also to the 
total gross income. If said fixed charges are not 
over 50 per cent of the net income and not over 20 
per cent of the gross income then, all things being 
equal, the bonds secured by a first mortgage on 
such property should be perfectly safe. If, how- 
ever, either of the above tests fail, an examination 
of the maintenance account should next be con- 
Lsi_dered. 

If the bond salesman, who needs to be well posted 
in order to bring out these points, shows that the 



172 BONDS AND STOCKS 

road is spending an abnormally large amount on 
maintenance, one may still be justified in purchas- 
ing the bonds; but if the maintenance figures are 
small compared with other roads located in the 
same territory, then it is well either not to purchase 
any securities of said road or else confine one's in- 
vestments to the old, underlying liens. 

Of course, the reader should not lose sight of the 
difference in priority of different issues. Some of 
the bond issues of a company, with a number of 
issues outstanding, will of course, take precedence 
over the others, and this fact of priority of liens is 
a very important one for the investor to ascertain. 

This, however, has previously been treated; 
sufficient it must be to say that buying railroad 
bonds is much like buying automobiles. If you 
are a good mechanic and thoroughly understand 
all the "outs" as well as the "ins," you may feel 
free to consider any one of the various makes of 
cars, as every make has some good point and is 
worth some price. If, however, you are not an 
expert, or you are unwilling to give a little time to 
studying the different makes, you had better confine 
yourself to the best makes and only reputable 
agents. In the same way, if the investor is unable 
to give a little of his time to definitely studying the 
subject of investments so that he can figure out 
values, important calculations and equities for 
himself, he had better confine his purchases to the 
underlying liens of old established properties and ^ 
pay the price. ^ 



CHAPTER X. 

SELECTmG RAILROAD SECURITIES. (STOCI^S). 

WE have considered the three main features 
of a railroad report; first, the amount 
required for fixed charges, second, the 
amount required for operating expenses, and third, 
that portion of operating expenses used for main- 
tenance. So far as the bond buyer is concerned, 
these are practically the only items he needs 
seriously consider. Before purchasing the stock 
of a railroad, however, there are other features 
which should be studied, the principal of which is 
the percentage of gross earnings available for div- 
idends, or to go a step further, the 'percentage 
earned on the stock. 

How Tlie Expert Writes His Report. 

When the stock of a railroad is being considered, 
it is generally assumed that the client would not 
consider said stock, unless the bonds are perfectly 
good. Therefore, if the relation of fixed charges 
to the net and gross earnings is satisfactory, an 
effort is then made only to ascertain first, the per 
cent of gross remaining for maintenance and div- 
idends after the payment of necessary operating 
expenses and fixed charges ; and second, the amount 
remaining for dividends on the Preferred and 
Common stocks after the payment of all operating 
expenses including maintenance, together with 
fixed charges. For instance, in a report relative 



174 BONDS AND STOCKS 

to the stock of the Atchison, Topeka & Santa Fe 
Railway Company for the year ending June 30, 
1911, a statement appears as follows: — 

^^Preferred stock of the Atchison, Topeka & 
Santa Fe Ry. Co. is outstanding to the amount of 
$114,173,730, or at a total average rate of $11,031 
per mile of road operated. The surplus with which 
to pay dividends thereon amounts to 19.5 per cent 
of the gross earnings, comparing with an allowable 
figure of about 17 per cent. For the fiscal year 
ending June 30, 1911, the total income available 
for dividends on the Preferred Stock, after the 
payment of all fixed charges, etc., amounted to 
about $2,065 per mile and the full dividends on 
the Preferred Stock require about $551 per mile. 
Therefore, about $18.72 per share was earned with 
which to pay full Preferred dividends of $5.00 per 
share, leaving a margin of about $13.72 per share. 
This company is considered in the class where such 
a margin over and above the Preferred dividends 
is satisfactory. The increase in net earnings for 
the year ending June 30, 1911, compared with the 
previous year, caused this "amount earned on the 
Preferred" to change from $17.89 to $18.72. 

"The Common Stock of the Atchison, Topeka & 
Santa Fe Py. Co. was outstanding to the amount 
of $168,430,500 or a total average of about $16,273 
per mile of road operated. The surplus with 
which to pay dividends thereon amounted to 13.9 
per cent of the gross earnings, compared with an 
allowable figure of about 11 per cent. For the 
fiscal year ending June 30, 1911, the surplus in- 



SELECTING RAILROAD SECURITIES 175 

come available for dividends on the Common Stock, 
after payment of all fixed charges and full div- 
idends on the Preferred Stock, amounted to about 
$1,415 per mile, and a dividend of $6.00 per share 
on the Common required $9.60 per mile. There- 
fore about $9.30 per share was earned ^vith which 
to pay the present $6.00 per share dividends on the 
Common Stock. It is interesting to note that the 
change in earnings, fixed charges, and amount of 
common stock outstanding for the year ending 
June 30, 1911, caused the ^^amount earned" on 
the Common Stock to change from $8.89 per share 
to $9.30 per share." 

In ascertaining the amount earned on the stock 
of any given road, a series of years should be 
taken ; for if the earnings for only one or two years 
are used, there is great liability that an unfair 
ratio may be obtained. A number of things might 
happen which would temporarily affect the earn- 
ings over a short period, but which would not 
materially change the earnings over a period of 
five years. The amount earned on the stock is an 
important figure; but it should be used carefully, 
and not without considering the stability of the 
gross earnings. For instance, two roads may be 
earning the same per cent, and yet one may have 
a much larger margin of safety than the other. 
They both may be earning ten per cent on their 
capital stock, but one may have a capitalization of 
$50,000,000 and the other $30,000,000. If, how- 
ever, in some poor year, there should be a great 
decrease in the gross earnings, and both companies 



171, BONDS AND STOCKS 

should suffer alike, the company with the larger 
capitalization and larger gross earnings would have 
a balance left for dividends, while the earnings of 
the second road might be entirely wiped out. The 
emphasis here may be placed upon the fact that the 
^^margin of safety" of two roads, each earning ten 
per cent on capital stock, is by no means the same. 
The surplus may be used in making a compari- 
son of two companies but only after various other 
items such as proper maintenance, etc. have been 
considered. As was previously explained, it is 
very important that a certain per cent of the gross 
earnings should be spent for maintenance each year 
upon every railroad in the United States. It can 
be readily seen that should it be found necessary 
to cut down the maintenance charges for one reason 
or another, the surplus might be greatly increased, 
or if maintenance is increased, the surplus be 
decreased, other items being the same. This is 
well illustrated by taking two roads, the first of 
which found it impossible to appropriate the neces- 
sary percentage of its gross for maintenance over a 
period of years, while the expenditures of the 
second for maintenance were even more than was 
absolutely necessary. If both roads should ex- 
perience very prosperous times over a series of 
years, the first would be obliged to increase its 
maintenance charges much more in proportion than 
would the second road, and thus not be able to add 
its additional earnings to surplus. The second 
road might possibly be able to keep its maintenance 
charges at the same rate, thereby being enabled to 



SELECTING RAILROAD SECURITIES 177 

increase its surplus and indirectly its margin of 
safety. The gross earnings of two roads, with a 
vast difference in miles owned but approximately 
the same capitalization per mile, may be equal, and 
in which case it will be readily seen that the smaller 
road may be greatly over-capitalized, and the mar- 
gin of safety upon its capital stock must necessarily 
be very small. 

It will often be noticed that some of the larger 
roads have a large leasehold interest and con- 
sequently guarantee the payment of the dividends 
upon the stock of the leased lines. This, in pros- 
perous years, will prove a great advantage, as in- 
creased earnings of leased lines will add greatly to 
the income of the guaranteeing company; but 
should a year of poor earnings and depression set 
in, this guaranteeing company may earn an amount 
equal only to what it has previously paid as div- 
idends on its own stock. As such guarantees are 
for definite dividends on the stock of a number of 
other roads, and the company is obliged to pay 
these before any dividends can be paid on their 
own stock, this may make it necessary for the 
parent company to reduce its own dividends. 

Average Figures. 

Instead of further describing the various factors 
to consider in a railroad report when selecting a 
stock for investment purposes, a list of average 
figures is prepared which enables the investor to 
quickly make tests for himself. It will be remem- 
bered that the .first item of importance is to note 



178 BONDS AND STOCKS 

the per cent of gross earnings consumed by fixed 
charges, it being stated that bonds of a road con- 
suming more than twenty per cent are not usually 
considered safe and conservative. The second 
main feature of importance, as is evident from this 
elementary article, is the margin over fixed charges, 
or the leeway which a company has for the possi- 
bility of decreased earnings before using up its 
total net earnings. These two items should be 
carefully studied when considering the purchase of 
a railroad bond. 

When considering the stock of a company, 
another item should be considered, namely, the per- 
centage of gross available for dividends. These 
three factors are the most important features con- 
tained in the report of any railroad company, and 
the investor should thoroughly understand the 
meaning and use of these three items in order to 
quickly interpret any railroad report. It will be 
seen that the first and last of these percentages are 
based on gross earnings, while the second one is 
based on net earnings. All three items combined, 
however, present a formidable and very conclusive 
digest of an entire report. 

In a small country like England it would be 
necessiary to give only three average figures, one 
for each of these three factors by which almost 
every report could be judged ; but in a large coun- 
try like the United States, such a procedure is very 
unfair. For instance, it has been worked out that 
in the case of the ^ew York, "New Haven & Hart- 
ford Railroad Company, it is entirely proper that 



SELECTING RAILROAD SECURITIES 179 

the fixed charges should consume 22 per cent of the 
gross earnings, that a margin of 36 per cent over 
fixed charges is safe, and that, if the surplus 
amounts to 11 per cent of the gross earnings, said 
surplus is satisfactory. It also would be entirely 
justifiable to use these same figures for the Boston 
& Maine Eailroad Company, and thus these two 
systems can be readily compared. On the other 
hand, to use the same figures to test the 'New York, 
isew Haven & Hartford system and the St. Louis 
& San Francisco system would be entirely im- 
proper. 

Instead of being located in a thickly settled New 
England territory with fairly regular trafiic, the 
St. Louis & San Francisco Eailroad is located in 
Oklahoma, Texas and other Southwestern territory, 
which is sparsely settled and where the trafiic is 
very largely dependent upon the crops, thus subject 
to great fluctuations. Consequently, to have the 
bonds of the St. Louis & San Francisco Railroad 
Company as good as the bonds of the I^ew Haven, 
the fixed charges of the St. Louis & San Francisco 
system should consume not more than 15 per cent 
of the gross earnings and the margin of safety over 
fixed charges should be 57 per cent. To have the 
stock of the St. Louis & San Francisco a conserv- 
ative investment stock, at least 18 per cent of the 
gross earnings should be available for dividends. 

The Great Railroad Zones. 

This therefore, necessitates dividing our country 
into different zones, or dividing the railroads of 



180 BONDS AND STOCKS 

our country into different groups. Leading experts 
have for convenience settled on eight groups, and 
these roughly are as follows : — 

(1) Eoads in the New England States. 

(2) Northern Eastern Roads. 

(3) Connecting Trunk Lines. 

(4) Middle Western Eoads. 

(5) The Pacific Eoads. 

(6) The Southern Eoads. 

(7) Pacific-Southern Eoads. 

(8) Southwestern Eoads. 

Of course, it is impossible to draw arbitrary 
lines, and one must use judgment in deciding to 
which group a given road belongs. A list of one 
hundred leading roads in the country, however, 
together with the group to which they are usually 
assigned, is herewith annexed. This list may be 
used by the investor in ascertaining to what group 
a road belongs ; then, by referring to the following 
table, he may quickly obtain the percentages which 
he will use in testing the report of the road in ques- 
tion. 

Table for Testing Eailroad Securities. 

Per cent of Gross Margin Per cent of Gross 

Group Coj.sunied by over Allotted to 

Fixed Charges Fixed Charges Surplus 

1 22 36 11 

2 21 39 12 

3 20 42 13 

4 19 45 14 

5 18 48 15 

6 17 51 16 

7 16 54 17 

8 15 57 18 



SELECTIXG RAILROAD SECURITIES 181 

Index Showing to What Group Any 
Kailroad Belongs. 

(Underlying liens of any of these should be safe 
investments), 

Alabama Great Sonthern 6 

Ann Arbor 4 

Atchison, Topeka & Santa Fe 7 

Atlantic Coast Line 6 

Baltimore & Ohio 2 

Bangor & Aroostook 3 

Boston & Maine 1 

Buffalo, Rochester & Pittsburg .... 4 

Canadian Northern 5 

Canadian Pacific 5 

Central of Georgia 6 

Central Bailroad of Xew Jersey .... 2 

Chesapeake & Ohio 3 

Chicago & Alton 4 

Chicago & Eastern Illinois ..... 4 
Chicago & ISTorth Western . , . . . .4 

Chicago, Burlington & Quincy . . . . 4 

Chicago Great Western 4 

Chicago, Indiana & Southern 4 

Chicago, Indianapolis & Louisville ... 4 

Chicago, Milwaukee & St. Paul .... 5 

Chicago, St. Paul, Minneapolis & Omaha . 5 

Cincinnati, Hamilton & Dayton .... 4 

Cincinnati, jSTew Orleans & Texas Pacific . 6 

Cleveland, Cincinnati, Chicago & St. Louis . 4 

Cleveland, Lorain & Wheeling .... 4 

Colorado & Southern 7 



182 BONDS AND STOCKS 

Cuba Railroad . . 4 

Delaware & Hudson .3 

Delaware, Lackawanna & Western ... 3 

Denver & Rio Grande . 7 

Detroit, Toledo & Jronton 4 

Duluth, South Shore & Atlantic . . . . 5 

Erie 3 

Evansville & Terre Haute 4 

Eort Worth & Denver City ..... 7 

Georgia Southern & Florida ... . . 6 

Grand Rapids & Indiana 4 

Grand Trunk Railway of Canada ... 6 
Grand Trunk Pacific . . . . . . .5 

Great IN'orthern 5 

Hocking Valley . . 4 

Illinois Central 4 

Indiana, Illinois & Iowa 4 

International & Great l^orthern .... 8 

Iowa Central 4 

Kanawha & Michigan 4 

Kansas City Southern . . . . . . G 

Lake Erie & Western 4 

Lake Shore & Michigan Southern ... 2 

Lehigh Valley 3 

Long Island 2 

Louisville & ISTashville . . . . . .4 

Maine Central 1 

Michigan Central 2 

Minneapolis & St. Louis 4 

Minneapolis, St. Paul & Sault Ste Marie . 5 

Missouri, Kansas & Texas 6 

Missouri Pacific System . . . . . .6 



SELECTING RAILROAD SECURITIES 183 

Mobile & Ohio . .• 6 

i^asliville, Chattanooga & St. Louis ... 5 

'New York Central & Hudson Eiver ... 2 

New York, Chicago & St. Louis .... 2 

New York, ^ew Llaven & Hartford ... 1 

Xew York, Ontario & Western .... 3 

Xew York, Susquehanna & Western ... 3 

j^orfolk & Western 3 

Northern Central 3 

Northern Pacific 5 

Pennsylvania 2 

Pennsylvania Company 2 

Pere Marquette 4 

Peoria & Eastern 4 

Philadelphia & Erie 3 

Philadelphia, Baltimore & Washington . . 2 

Pittsburgh & Lake Erie 3 

Pittsburgh, Cincinnati, Chicago & St. Louis 3 

Heading Company 3 

Rock Island System 7 

Rutland .... ...... 1 

St. Louis k, San Francisco 8 

St. Louis & Southwestern ...... 8 

Seaboard Air Line 6 

Southern Pacific System 5 

Southern 6 

Texas & Pacific 8 

Toledo & Ohio Central 4 

Toledo, St. Louis & Western . . . . . 4 

Union Pacific 5 

Vandalia . . , . 4 

Wabash . . 4 



184 BONDS. AND STOCKS 

West Jersey & Seashore . ' . . . . . 3 

Western Maryland 3 

Western Pacific 6 ■ 

Wheeling & Lake Erie 4 

Wisconsin Central 4 

Yazoo & Mississippi Valley . . . . . 6 

It will be seen that the above table affords a 
simple method of testing a report of any railroad 
company, it being necessary simply to ascertain to 
what group the road belongs and then to test the 
actual percentages by the ideal percentages given 
for that particular group. By working out the 
figures on two roads, their stocks may be readily 
compared by noticing which road makes the best 
showing compared with the ideal figures for its 
group. 

Of course, when stocks are purchased for specu- 
lation, there are other factors which must be con- 
sidered. There are times, when, owing to funda- 
mental business conditions, the stocks of all of the 
above roads are a good purchase and any investor 
buying such stocks is sure to make a profit; but 
until these times come, it is not well for the in- 
vestor to attempt to speculate in any one or two 
properties. During such times one should confine 
his purchases simply to a few of the highest grade 
railroad stocks, such as the Pennsylvania, Chicago 
and Northwestern, Illinois Central, E'ew York 
Central & Hudson Piver, Louisville & ISTashville, 
'New York, New Haven & Hartford, Delaware & 
Hudson, Great Northern, ISTorthern Pacific, South- 
ern Pacific and a few others. 



SELECTING RAILROAD SECURITIES 185 

^Vlien selecting stocks, however, for permanent 
investment, to be put away in a tin box and for- 
gotten, the investor should make the tests above 
suggested and should purchase only such stocks 
that pass these tests. These tests given above are 
in most cases sufficient for the purpose ; but if it is 
desired to make a further study, it is well to work 
out additional figures comparing them with figures 
of other roads similarly located. For a suggestion 
as to four of these features, the following conclu- 
sions taken from the above mentioned report on 
the Atchison, To|)eka & Santa Fe may be of in- 
terest : — 

(1) There has been an increase of 12.1 per 
cent in "total capitalization" per mile owned since 
June 30, 1901, when said figure stood at $52,808, 
compared with $59,193 on June 30, 1911. 

(2) There has been an increase of 23.2 per 
cent in "total net earnings," excluding taxes, per 
mile operated since June 30, 1901, when said- 
figure amounted to $2,887 compared with $3,769 
on June 30, 1911. 

(3) The per cent of "total gross" spent on 
"maintenance" has changed from 24.7 per cent in 
1901 to 29.8 per cent for the year ending June 30, 
1911, during which latter year about $1,552 per 
mile was spent on "maintenance of way and struc- 
tures," and about $1,612 per mile on "maintenance 
of equipment." 

(4) The per cent of "total gross" consumed by 
"fixed charges" and "conducting transportation 
and general expenses" has changed from 52.3 per 



186 BONDS AND STOCKS 

cent in 1901 to 50.7 per cent for the year ending 
June 30, 1911. 

The difference hehueen this last figure and 100 
per cent, namely Jf-9.3 per cent, shoius in percentage 
the balance of the gross earnings available for 
maintenance J, improvements and dividends. This 
balance is one of the most important figures of the 
entire report. The larger the percentage of balance 
and the more steady and constant its growth — all 
else being equal — the more valuable is the stoch. 



SELECTIXG RAILROAD SECURITIES 187 



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CHAPTER XI. 

ELECTRIC RAILWAY SECURITIES, 

The Link Between the Investor and the Voter. 

A BOOKLET on Electric Railway securities 
published recently by one of the largest 
banking houses in this country, reads in 
part as follows: — 

''As the security of government and municipal 
bonds lies in the ability of the people to pay taxes 
and the extent to which they are burdened there- 
withj so the security of the public service corpora- 
tion bonds lies not so much in the plants or real 
property possessed as in the degree to which the use 
of their facilities is imperative; things without 
which the people cannot get along; for the extent 
to which their use is absolutely necessary, is their 
support, a tax upon the people ; a tax even more 
impossible to escape than those imposed by legisla- 
tion, because the laws by which they are levied are 
natural instead of legislative. 

''It is unnecessary to explain in detail the way in 
which public service corporations tax the people, 
their commerce and their industries. The flames 
from burning home and factory quenched by the 
streams from neighboring hydrants prove the worth 
of water bonds. Likewise, the throngs of clerks 
and workmen carried every morning from their 
homes to the office or shop and back again at night 
are proof of the security of street railway bonds. 
The fact that such a statement as this seems so 



ELECTRIC RAILWAY SECURITIES 189 

commonplace is proof of the necessity resting npon 
the people, industries and commerce to support 
these public utilities." 

The principle exploited in the above statements 
is radically wrong, and is at the bottom of ninety 
per cent of all financial and political troubles affect- 
ing railway properties in our large cities today. 
The point made by this writer, that the actual cost 
or replacement value of the real property possessed 
is a secondary matter; and the strength of street 
railway securities lies in the power of the company 
to tax "the throngs of clerks and workmen carried 
every morning from their homes to the office and 
shop and back again at night," is an exploded 
fallacy. Fortunately for the citizen and unfortu- 
nately for the promoter, there has been progress in 
civic conditions as well as in means of transporta- 
tion, methods of manufacture and other lines, and 
although the principle outlined in the above quota- 
tion could have been depended upon and utilized a 
dozen years ago, this is not the case today. 

Today, unless street railway securities are rein- 
forced by property, the actual replacement value of 
which exceeds the market value of the securities, 
they will not be recommended by conservative bank- 
ing houses. There was once a time when a street 
railway company could increase its earnings so as 
to pay the interest on almost any capitalization by 
simply increasing the rate of fare (or decreasing 
the service) on its roads ; for, as the above writer 
suggests, it is absolutely necessary for the people to 
use the street railway whatever the rate of fare or 



190 BONDS AND STOCKS 

the condition of the service. This very fact, how- 
ever, has caused the courts to rule that this ques- 
tion of fares and service is a public question to be 
decided not by the company, but by the public 
through their official commissioners, and thus with- 
in the last few years in many cities "the goose that 
lays the golden eggs" has been killed. 

The Franchise. 

Although franchises should not be capitalized, 
yet they are absolutely necessary to the operation 
of all public service corporations. A charter of a 
street railway company differs little from the char- 
ter of a manufacturing or business corporation. 
The charter is obtained from the state, and is 
simply a permission to organize a company for 
carrying on a certain line of business without 
inflicting personal liability upon the owners. 
Although in some states the charters are for a 
limited number of years, yet they can almost 
always be renewed, and practically speaking, are 
perpetual. The fact, however, that a charter is 
perpetual is usually of no special interest to the in- 
vestor. What the investor is interested in is the 
francJiise, which is an entirely different matter. 
To obtain a charter for a company is usually a 
matter of form; but after the charter is obtained 
and the company is organized, to obtain a franchise 
for operating a street railway in any city is an en- 
tirely different matter. 

The franchise is a license to lay tracks and 



ELECTRIC RAILWAY SECURITIES 191 

operate cars in tlie streets of a city, and said license 
is granted by the local government of said city. 
In fact, the franchise of a street railway is identi- 
cally like the license of a liqnor dealer. Three 
men could at any time organize a corporation to sell 
liqnor in 'New York or any of onr large cities hav- 
ing a license system; hnt the charter which is ob- 
tained from the state is not sufficient. After 
obtaining the charter, a license must then be 
obtained from the license commissioners of the city 
of ^ew York. With such a license the corporation 
would be able to sell liquors in Xew York; but 
without said license, their charter would be abso- 
lutely valueless. J^ow, instead of calling this right 
to operate street cars a ^'license" like, the right to 
sell liquors, to collect junk, or to operate taxicabs, 
it is termed a "franchise." 

There are three classes of these franchises : — 

(1) The so-called perpetual or nine hundred 
and ninety-nine year franchise. 

(2) The limited franchise operating from 
twenty to fifty years. 

(3) The terminable franchise which, in fact, 
is often perpetual but in theory can be revoked at 
any time. 

Certain street railways in Xew York City serve 
as the best illustrations of the first mentioned fran- 
chise, and without doubt these franchises for the 
old surface lines operating in the lower part of 
Manhattan Island are extremely valuable. Based 
on the principle outlined in the quotation given in 
our first paragraph, they were at one time thought 



192 BONDS AND STOCKS 

SO valuable that the stock of the Metropolitan 
Street Railway Company sold at $182 per share 
and paid a dividend of 7%. In fact, a purchaser 
of this stock at such a price, stated at that time that 
there would be no limit 'to what the stock would 
eventually sell for. He said, ^^The stock of the 
Metropolitan Street Railway will go above $250 
and I believe ultimately to $500 a share, because 
the company operates in the largest city of our 
country; it has a monopoly of the business, and 
owing to its long franchise, has the people of ISTew 
York at its mercy." 

Fortunately for the voter and unf ortimately for 
the promoter the courts have ruled that a street rail- 
way company may have an exclusive franchise for 
a limited reasonable length of time — say twenty or 
thirty years — or a perpetual franchise which is not 
exclusive^ but it cannot have both. Therefore, the 
city government of 'New York granted another 
franchise to the Interborough Company to operate 
a subway under the same streets in which the 
Metropolitan Street Railway operated. But this 
was not all. In addition the New York legislature 
said, "If your franchises are as valuable as you 
represent, then we will tax you for them." Con- 
sequently a tax was imposed on this company 
which, combined with the competition of the Inter- 
borough Railway, most seriously affected the earn- 
ings of the Metropolitan Street Railway Company. 
Within a term of ten years or so, the stock fell 
from $182 a share to $15 a share. Therefore, it 
will he seen that although the so-called perpetual 



ELECTRIC RAILWAY SECURITIES 193 

franchise is a very good thing to have, yet no street 
railway corporation can taJce undue advantage of 
it as no perpetual franchise is exclusive, and if it 
is of undue value, said value of the ''unearned in- 
crement" can he very heavily taxed. 

The second class of franchise known as the 
"limited franchise" is perhaps best illustrated in 
the case of the City of Chicago. Here, certain 
franchises were obtained by the late Chas. T. 
Yerkes for definite periods, and these franchises' 
were probably exclusive until they expired. By 
continually obtaining new franchises for exten- 
sions, investors were fooled into believing that 
these new franchises prolonged the old franchise. 
Because a new franchise, however, was obtained for 
fifty years for a suburban line, this had no effect 
towards lengthening the franchise on the down- 
town district that was given — say forty years pre- 
vious and had only ten years longer to run. ]^ever- 
theless, the value of these suburban lines very large- 
ly depended upon the entrance to the business sec- 
tion of the city, or, in other words, on these old 
franchises which were about to expire. Therefore 
when the first of these old franchises in the down- 
town district expired, the voters of Chicago had an 
advantage over Mr. Yerkes or rather the holders of 
the securities ; for ]\Ir. Yerkes had already sold out 
and gone to London looking for larger worlds to 
conquer. 

Unlike the citizens of !N'ew York, the voters of 
Chicago were not obliged to resort to heavy taxa- 
tion or to building subways, but had absolute con- 



194 BONDS AND STOCKS 

trol of the situation through their power to dictate 
who should have the new franchises on certain 
down-town lines and upon what terms. The im- 
portance of this power held by the voters of 
Chicago is best illustrated by the fact that the stock 
of the Chicago Union Traction Company, which 
sold for $23 a share in 1902, declined to about 60 
cents a share in 1908. IN'otwithstanding the fact 
that the city of Chicago was very fair in the final 
disposition of this problem and in the renewal of 
these franchises, yet it was necessary to reorganize 
its street railway properties, severely cutting down 
the capitalization, extracting millions of dollars of 
water from the stocks, changing fixed interest bear- 
ing junior lien bonds to income or adjustment 
bonds, and leaving intact only the underlying liens 
and the well seasoned bond issues.* In short, the 

*The Chicago Union Traction Company operated 306 roiles of 
the Street Railways of Chicago, all rights to operate 137 miles 
of which absolutely expired on or before July 1, 1907. Rights of 
operation over 70 miles were subject to termination at the will 
of the City of Chicago, and rights on 99 miles were to exy)ire 
from time to time, beginning in the early part of 1908. The 
city granted the new franchise on the basis of a compensation to 
the city of a percentage of the Company's surplus earnings. 
The s'lrplus earnings so divided, are net profits from operation 
after deducting a sum equal to 5 per cent on an agreed valuation 
of $30,500,000, which was over $5,000,000 in excess of the total 
of all of the Company's old bonds, and over $1,000,000 in excess 
of the entire indebtedness, including unsecured indebtedness. 

The new company authorized two issues of bonds. Of the 
First Mortgage issue, bonds may be issued from time to time to 
pay for a certain proportion of the cost of extension to the 
property. It gave new bonds of the Consolidated Mortgage 
issue in exchange for the old underlying bonds, representing the 
full face value of the latter in proportion to the relative impor- 
tance to their liens upon the property. It also issued bonds of 
the same issue to retire the unsecured indebtedness, and re- 
served $6,000,000 of the same issue as collateral security to an 
issue of notes which it sold to pay for improvements and other 
immediate corporate requirements. 

The new franchise provides that the city may purchase the 
properties at any time at the above mentioned agreed valuation 
— $30,500,000 — plus whatever amount may be subsequently spent 
upon the properties for extensions, etc. The city thus places a 



ELECTRIC RAILWAY SECURITIES 195 

capitalization was reduced to a point which coin- 
cided with the actual physical replacement values 
of the properties. It is almost fundamentally true 
that a street raihvay company in a reasonably sized 
city can he depended upon to pay a fair rate of 
interest on its replacement value, hut the conserva- 
tive investor will purchase no securities which are 
not fully protected hy actual physical property of 
equal replacement value. 

The third form of franchise known as the so- 
called "good behavior franchise" is best illustrated 
in the case of the street railways of Massachusetts 
where franchises are granted with no reference to 
time in any way. The railways claim that, as no 
time is stated, they are practically perpetual ; while 
the public claims that the fact of no time being 
stated makes them revokable at any time. Prac- 
tically, the railways' point of view is correct 
although theoretically there is little doubt but the 
franchise of any street railway company operating 
in any of the large Massachusetts cities could be 
revoked at any time if a corporation took undue 
advantage of the people of said city. It might take 

minimum valuation upon ttie properties which it must pa.y, which 
includes the value represented by the old bonds and by the new 
investment. In the event that the city does not purchase the 
property, it agrees not to grant any franchise to any other com- 
pany, unless that company will purchase the property at the 
above mentioned valuation. The old stocks were exchanged for 
the new company's stock in proportion to certain agreed relative 
values and certain junior bonds were adjusted in the same way. 
Very little disposition on the part of the people is noticeable 
to take away or destroy real property values, although there will 
be attempts to squeeze out some of the water. Therefore, in 
reorganizations soon to take place, it will be the stockholders 
who will suffer in the loss of paper profits rather than the in- 
vestors in the bonds which are honestly sold and used to build 
or improve the property. 



196 BONDS AND STOCKS 

two or more years to do it and the approval of tlie 
state railway commissioners would doubtless be 
necessary; but there is no doubt but the people 
could force the company to come to terms. 

Although incomprehensible to many people out- 
side of New England, this Massachusetts system is 
working out very successfully for all interests, as 
both parties have been on their good behavior. To 
begin with, the street railway companies have kept 
their capitalization within the replacement values 
of the properties, so that they can liquidate at any 
time without a loss to the bondholders. This re- 
sults in giving a very low rate of fare in large cities 
like Boston where it is said one is able to ride 
further for -^ve cents than in any other city in the 
world. On the other hand, the fact of having this 
power to revoke the franchise at any time has made 
people more liberal with the companies than they 
otherwise might be. In many instances where a 
fare of five cents has not been sufficient the people 
have allowed an increase to six cents, which proba- 
bly would not have been permitted under a term or 
limited franchise, so common in our western states. 

Of course, there is one advantage possessed by 
Massachusetts and other eastern street railways, 
which is not possessed by many in the west ; name- 
ly, that the securities of such corporations are 
owned largely in the locality in which the company 
is operating. For instance, the majority of the 
stock of the street railway operating in Boston is 
owned in Boston, and human nature is such that it 
is much more difficult to obtain legislation in Bos- 



ELECTRIC RAILWAY SECURITIES 197 

ton adverse to the street railways than it would be 
to obtain legislation against street raihvays owned 
by men living without the state. Therefore, the 
residence of the ownership is an important factor 
to consider when studying street railway securities. 

Other Factors to Consider. 

When considering street railway securities, all 
the various factors to study may be summarized 
under the two following headings : 

( 1 ) Franchise and property value. 

(2) Earnings and management. 

Many writers make four or more factors, but these 
two are sufficient because of the relation which the 
franchise bears to the property value and the earn- 
ings to the management and vice versa. Although 
the franchise should not be capitalized, yet we have 
seen that it is a very vital matter, and in fact, an 
absolute necessity for the operation of a street rail- 
way company. A street railway company, the se- 
curities of which are paying dividends today due 
to the value of their franchise rather than to the 
value of the property, is like a battleship with the 
highest powered guns and great quantities of am- 
munition but without any armor plate. So long as 
it alone does the firing, its strength is invincible, 
but when the enemy fires back, its own huge guns 
only tend to make it sink more swiftly. Therefore, 
franchise and replacement value may be placed 
together, and investors in street railway securities 
should first ascertain if the franchise is satisfactory 
and the replacement value is sufficient to cover the 



198 ' BONDS AND STOCKS 

securities which are being considered, and at any 
rate, sufficient to cover all fixed interest-bearing 
securities. 

Much attention has not been given to earnings, 
because the earnings of street railway properties 
located in cities are almost universally sure of 
equalling the interest on their replacement value. 
In the cases of 'New York, Chicago, Cleveland and 
other cities where the street railway companies have 
had difficulties, there has been no trouble with the 
earnings on a fair capitalization. The record of 
earnings of our country's street railway properties 
is extremely favorable. Of course, the case of 
interurban lines built in competition with steam 
railroads is another matter. In such a case, the 
electric railway has not a natural monopoly as has 
the city lines, it being continually subject to com- 
petition not only of the steam railroads, but also of 
other electric lines which may at any time be con- 
structed. For this reason, investors purchasing 
bonds of interurban street railways must use much 
more care than when purchasing bonds of street 
railways in cities. E'ot only must the franchise 
and replacement value be carefully considered, but 
the earnings and management should likewise be 
most carefully studied, and conservative investors 
do not buy bonds of interurban roads on estimated 
earnings but wait until the company has com- 
menced operation, closed its ^^construction account" 
and is earning about double its interest charges, 
showing what it actually can do when the railroad, 
which it parallels, has reduced its fares and real 
competition exists. 



ELECTRIC RAILWAY SECLTIITIES 199 

As to management, this is an item which is too 
often overlooked by the average investor. Many 
who are very scrupulous regarding their own per- 
sonal affairs will buy securities of corporations 
which they know to be operated by men of ques- 
tionable principles, and then be surprised because 
the securities decline in value. When one buys 
stocks in a company, he practically enters into 
partnership with the other stockholders, and he 
therefore should take great care to purchase securi- 
ties only of companies which are operated by high 
grade, honest men and which securities are offered 
by well-known, established dealers. It is as reason- 
able to expect to climb around a boiler without 
getting soot on one's clothes, as to buy securities in 
companies kno^^m. to be operated by disreputable 
men and avoid losses. 

On the other hand, such bonds of street railway 
compa7iies operating in the large cities with normal 
franchises and management, where the bonded debt 
is less than the replacement value should be abso- 
lutely safe investments, as the earnings are almost 
certain to be sufficient to pay the interest on all 
legitimate indebtedness. The first mortgage bonds 
of many interurban lines should be absolutely 
safe, although in such cases, in addition to the 
above mentioned factors, the record of earnings 
should be carefully studied ; and the investor should 
confine himself either to underlying liens of such 
properties or else to issues where the net earnings 
are doubly sufficient to pay the interest thereon. 



BONDS AND STOCKS 

Why Electric Eailway Securities are 
Easy to Sell. 

There are very few classes of securities which 
have the extremely good record that our electric 
railway securities have. The record of the nation's 
street railways is infinitely more enviable than that 
of its steam railroads. Although the people can 
curtail their requirements which form the basis of 
the business of our steam railroads, they can only 
to a small extent curtail the basis of the business of 
our street raihvays. For this reason, the earnings 
of a street railway in times of panic and depression 
fall off very slightly if any, compared with the 
great falling off in the earnings of the steam rail- 
roads. Moreover, the population of our cities is 
rapidly increasing, while a normal rate adds greatly 
to the earnings of the street railways. It is claimed 
that the earnings of a well managed street railway 
company increase as the square of the population. 
This not only has the effect of causing an increase 
in earnings, but also compels companies to expand 
and issue additional securities, which in the case of 
the present outstanding closed mortgages must 
eventually be very beneficial. If a company can 
now earn a good surplus above its interest charges, 
there should be no question about its ability in 
years to come, when it will have made important 
additions and extensions to its property. There- 
fore, holders of bonds now outstanding the mort- 
gages of which are closed, will in many instances 
have the satisfaction of soon seeing their bonds 



ELECTRIC RAILWAY SECURITIES 201 

become an underlying lien of a large system^ fol- 
lowed hy one or more refunding issues. 

The strongest feature, however, connected with 
street railway securities is the fact suggested above 
^'that business depressions seem to have very little 
adverse effect upon the earnings," and in fact, such 
securities hold a most enviable record in this re- 
gard. This can perhaps be best illustrated by the 
following table prepared by Gardner F. Wells 
which shows three important factors : 

(1) The constant increase in gross earnings of 
street railway securities. 

(2) The increase in street railway earnings 
even during periods of great business depression. 

(3) The steadiness of street railway earnings 
compared with steam railroad earnings. 

Although the same laws \vould doubtless be found 
to apply to the street railways of any city, the 
street railways of Massachusetts are used as an 
illustration on account of the record of Massa- 
chusetts roads being much more complete. The 
table is as follows : 

Earnings From Operation of Massaclmsetts 

Steam and Street Eailway Companies 

"Since 1865. 

steam R. R. St. Ry. 

Year Earuiui^s Earnings 

1865 $18,974,915 $1,562,171 

1866 21,205,528 1,707,447 

1867 21,561,061 1,794,950 

1868 22,761,647 1,861,311 

1869 24,539,722 2,064,690 



202 BONDS AND STOCKS 



Year 


steam R. R. 
Earnings 


St. Ry. 

Earnings 


1870 


25,003,953 


2,081,751 


1871 


26,615,459 


2,318,001 


1872 


29,754,241 


2,522,589 


1873 


33,310,479 


2,563,146 


1874 


32,681,956 


2,894,024 


1875 


30,786,295 


2,960,491 


1876 


29,855,800 


2,975,091 


1877 


28,931,988 


2,987,406 


1878 


28,003,236 


3,008,911 


1879 


29,152,829 


3,179,702 


1880 


33,661,823 


3,711,378 


1881 


35,936,303 


4,033,244 


1882 


39,094,369 


4,494,957 


1883 


41,635,800 


4,583,042 


1884 


41,456,977 


4,910,102 


1885 


41,742,341 


5,108,715 


1886 


46,171,689 


5,786,756 


1887 


50,068,658 


6,381,404 


1888 


53,720,035 


6,824,317 


1889 


55,856,901 


7,523,575 


1890 


59,230,761 


8,348,285 


1891 


61,483,104 


8,861,841 


1892 


64,143,287 


9,798,060 


1893 


70,935,930 


10,832,174 


1894 


64,128,423 


11,119,846 


1895 


68,154,906 


13,184,342 


1896 


74,886,480 


14,844,262 


1897 , 


71,934,773 


15,815,267 


1898 


73,599,534 


16,915,405 


1899 


75,430,062 


18,151,550 



ELECTRIC RAILWAY SECURITIES 203 





steam R. R. 


St. Ry. 


Tear 


. Earnings 


Earnings 


1900 


82,191,293 


19,999,640 


1901 


82,385,586 


21,766,340 


1902 


86,920,565 


23,486,474 


1903 


93,325,932 


25,540,811 


1904 


95,280,348 


26,207,247 


1905 


98,899,235 


27,041,291 


1906 


105,954,452 


29,563,892 


1907 


111,433,939 


30,557,862 


1908 


106,309,486 


30,780,962 


1909 


108,105,772 


31,956,007 


1910 


120,140,993 


*24,032,236 


1911 


123,959,490 


35,036,997 


1912 


129,074,311 


36,080,237 



"For nine montlis ending June 30, 1910. 



t) 



]^ote: — Steam Railroad figures are for years 
ending June 30, Street Railway figures are for 
years ending Sept. 30. 

Of course, when comparing street railway secur- 
ities with industrial securities, the contrast is even 
more marked, for wdiile the gross earnings of the 
principal electric railway increased ahout five per 
cent in 1908 over 1907, the gross earnings of thir- 
teen of the nation's principal industrial concerns 
decreased ahout thirty-five per cent, and the gross 
earnings of the steam railroads decreased in 1908 
over 1907 ahout eight per cent, or from 
$2,602,757,503 in 1907 to $2,407,019,810 in 1908. 

It will he seen, therefore, that the honestly issued 
bonds of street railway companies ivhich are being 
operated today, by men who stand for what is right 
and best in the community should be safe and 



204 BONDS AND STOCKS 

attractive investments^ second only to the highest 
grade municipal and underlying steam railroad 
bonds. The best combination of yield and security 
can today be found in certain well-seasoned street 
railway bonds which are now being offered by 
established bond dealers of irreproachable integrity. 
On the other hand, unless one is fnllj acquainted 
with all conditions affecting a property, it is well 
to purchase only the mortgage bonds of city roads, 
and such bonds as are protected by real property 
of a replacement value exceeding the bonded debt, 
preferring underlying liens when they are obtain- 
able. 



CHAPTER Xn. 

LIGHTING SECUIIITIES. 

The struggle Between the Gas Companies 
and the Electric Companies. 

FEW people, excepting those in the innermost 
councils of certain gas and electric lighting 
companies, realize the great revolutionary 
possibilities in the so-called ^^fireless cooker/' differ- 
ent makes of which are being advertised in the 
leading magazines today. Although little has been 
written or heard of the imderlying principles in- 
volved, probably few inventions since the electric 
motor has the possibilities of so radically changing 
household methods as has the invention of the fire- 
less cooker, and yet this is no new invention. A 
sea captain brought from China to his home in 
Gloucester, Massachusetts, a hundred or more years 
ago, a tea basket which operated on the same iden- 
tical principle as our modern fireless cooker ; name- 
ly, that of obtaining a certain degree of heat and 
holding and concentrating said heat for use ex- 
clusively in cooking a certain food. 

One of the greatest wastes today exists in con- 
nection with the application of heat. Think of the 
great heat waste connected with the operation of 
several hundred thousand locomotives, as they are 
racing back and forth across our continent ! These 
locomotives are actually endeavoring to heat all out- 
doors, and at the same time save som.e of the heat 
to generate power. Think of the great amount of 



206 BONDS AND STOCKS 

heat wasted in our nation's blast furnaces simply 
for the purpose of melting certain ores. Think of 
the intense heat wasted in the boiler rooms of 
steamships, oifice buildings and factories. Not 
only is this heat wasted, but money and power is 
expended to remove this heat so as to make such 
places livable for the engineers and firemen com- 
pelled to work there. All of this is as nothing 
compared with the great waste of heat in the mill- 
ions of kitchens throughout the world. If our 
mothers and sisters could concentrate all of the 
heat which they are producing in their stoves 
directly on the article which is being cooked, think 
of the saving of fuel, energy and health. 

"E'ow what has this to do with lighting securi- 
ties," the reader asks, and briefly the answer is as 
follows : The ultimate value of lighting securities, 
lohether the lighting is hy gas or electricity, rests 
not in the use of gas or electricity for lighting pur- 
poses, hut rather in its use for heating and cooking. 
The people today have all the light necessary, and 
although the demand for light will increase to a 
certain extent with the population, yet it does not 
need to increase proportionately with the popula- 
tion, as two or three people in a room require no 
more light than one person; while a family of 
twelve in the poorer quarter of a city will use only 
a small fraction of the light used by a wealthy 
family of three in its city mansion. Therefore, 
the future of gas and electric securities depends 
upon the use of gas and electricity for cooking and 
heating purposes rather than upon their original 
use which was for lighting purposes. 



LIGHTIXG SECURITIES 207 

The Great Handicap of Lighting Securities. 

Up to the present time, gas companies and elec- 
tric companies have been greatly handicapped in 
the sale of their product by the expenses of man- 
ufacture. Although seldom realized, there is little 
or no expense connected with the "manufacture" 
of coal, the principal item of expense being the 
extraction from the mine and the transportation. 
The process of hauling it through the streets from 
coal yard to the house and carrying the same into 
the cellar often costs more per ton than the coal 
itself before removed from the mine. All gas com- 
panies and such electric companies as do not obtain 
their power from water power are obliged to pur- 
chase this coal, have it transmitted to their plant, 
and burn the same even before obtaining the gas or 
electricity, which they in turn will sell. Con- 
sequently, it will be seen that for purposes other 
than lighting, gas companies and electric companies 
are greatly handicapped, and no corporation can 
buy coal and use it for the generation of gas and 
electricity, and then sell and distribute said product 
for a price which will enable a housewife to use it 
for her cooking as cheaply as if she purchased and 
used said coal herself. 

As ''necessity is the mother of invention," the gas 
companies, when forced out of the cream of the 
lighting business by the invasion of the electric 
ligliting companies, succeeded in cheapening the 
cost of producing gas so that it could be used for 
cooking purposes. This use has greatly increased, 
so that today, instead of the greatest consumption 



208 BONDS AND STOCKS 

of gas being on Christmas Eve, as was the case 
twenty-five years ago, it is now on Jnly Fourth. 
In fact, if the gas companies had not been able to 
reduce the cost and increase the efficiency of that 
product so as to make it practical for cooking pur- 
poses, there would have been reorganizations of a 
large percentage of our nation's gas companies 
since the invasion of the electric light. Instead, as 
the gas companies have been able to adapt their 
product to cooking uses, their output has continual- 
ly increased and gas securities have a most enviable 
record for stability and strength. In fact, it is 
claimed that no other class of bonds show such a 
small percentage of defalcations as gas securities, 
and the following, taken from a circular of a firm 
which makes a specialty of selling gas bonds, is 
doubtless true : 

"Gas bonds have a first-class record for safety. 
A gas bond usually is secured by a mortgage on all 
the property, rights and franchises of the company 
issuing it. The condition and value of the prop- 
erty is passed upon by a competent gas and me- 
chanical engineer before the bonds are issued. The 
bonds are issued only with the approval of a trust 
company as trustee, after the trust company's at- 
torneys have decided that the bond may be issued 
in accordance with the terms of the mortgage and 
trust deed. A gas company operates under the 
franchise or license of a city, and usually only one 
company serves each community. Gas is a "neces- 
sity," and the residents of the community use gas 
for cooking and lighting, with practically the same 



LIGHTING SECURITIES 209 

certainty that they pay taxes, or use the utilities 
which are furnished by the municipality itself. 
The business is operated upon a broad foundation, 
relying upon a small profit from many customers, 
instead of a large profit from a few. Experience 
has proven that the use of gas is not noticeably 
affected in times of panic or general business de- 
pression. The decisions of the highest courts of 
the land, including the United States Supreme 
Court, have protected the rights and favored the 
interests of bondholders. All these facts add safe- 
ty and soundness and stability to gas bonds as in- 
vestments.'' 

At present time, most families of average means 
use electricity for lighting and gas for cooking pur- 
poses either all or a part of the year, and as long as 
conditions remain in statu quo, the earnings of 
both gas and electric securities should gradually 
increase in a growing community where the com- 
panies are properly managed. 

New Inventions. 

If, however, any method should be discovered 
whereby either gas or electricity could be delivered 
to the housekeeper at very much cheaper rates, or 
whereby the househeepef could concentrate all her 
heat, luasting none, then there is likely to be a 
revolution in lighting securities. As to whether 
the gas companies or the electric lighting com- 
panies would reap the greatest harvest from such 
an invention, it is impossible now to anticipate, but 
certain new developments indicate that the electric 



210 BONDS AND STOCKS 

lighting companies are almost sure to receive a 
distinct benefit. 

As readers know, the fireless cooker is today used 
most exclusively by those who have gas stoves. The 
old method of boiling a leg of lamb necessitated the 
placing of the meat in a kettle on top of the stove 
and keeping a good fire under it for two or three 
hours. If wood were used, several baskets would be 
consumed ; if coal were used, nearly a hod would be 
consumed ; while to use a gas stove for such a pur- 
pose is now a distinct and expensive luxury. 
Where intense heat is required quickly, such as for 
broiling steaks, cooking muffins, etc. a gas stove has 
a distinct advantage and is doubtless cheaper than 
a coal or wood fire; but for cooking an ordinary 
dinner which requires about two hours or more, a 
gas stove is far from economical. 

The fireless cooker, however, enables the house- 
wife to heat a metal plate, which performance takes 
about twenty minutes, place this metal plate in a 
compartment of the cooker, put over it the recep- 
tacle containing the leg of lamb and a little water, 
close it up and in two or three hours the meat is 
perfectly cooked. It thus will be seen that the fire- 
less cooker has already made the use of gas practi- 
cal and cheap for general cooking purposes, where 
heretofore it has been a luxury; for in above ex- 
ample, instead of using gas for two hours to cook 
a leg of lamb, it is now necessary to use it only 
twenty minutes. Therefore, at the present time, 
gas companies have a distinct advantage over elec- 
tric light companies, and their earnings are rapid- 



LIGHTING SECURITIES 211 

lij increasing and gas securities of all Icinds stand 
comparatively high. 

Certain of our large electrical companies, how- 
ever, are strenuously working to discover an electric 
fireless cooker, whereby the metal plate may be 
heated by electricity directly in the cooker and thus 
eliminate the waste of heat required in heating said 
metal plate on the gas stove. If it is accomplished 
and the gas companies do not discover some offset- 
ting invention, the electric fireless cooker should 
cause a great boom in most electric securities, and 
may be a severe blow to some gas companies. 

Factors to Consider When Selecting 
Lighting Securities. 

This condition of affairs has been explained in 
detail because this is the great fundamental factor 
which our nation's large electric and gas interests 
are so carefully considering today; and because 
this subject is of most vital interest to the pur- 
chasers of stock in either gas companies or electric 
companies. ^^Stock" is emphasized because this is 
not a question which the investor who buys only 
seasoned gas or electric bonds need bother his head 
about as there are much more important factors for 
him to consider. As in the case of electric railway 
securities and the securities of other public service 
corporations, these other factors to be studied in 
the selection of lighting securities may be grouped 
under the two following headings : 

(1) Franchises and replacement values. 

(2) Earnings and management. 



212 BONDS AKD STOCKS 

As we treated so fully tlie subject of franchises 
and replacement values in our discussion of street 
railway securities, it is not necessary to repeat the 
same here. However, it should be remembered 
that the same fundamental principles apply to the 
franchises of lighting companies as to street rail- 
way companies. The only reason that we do not 
today hear so much about lighting franchises as we 
do about street railway franchises is that, first, 
lighting franchises have not as yet begun to expire, 
and secondly, because the public is not brought into 
such direct touch with the employees of a lighting 
company as with the employees of a street railway 
company. Moreover, the manager of a lighting 
company knows by watching his volt meter and 
ampere meter, the quality of light which every 
patron in the city is receiving, while the manager 
of a street railway company has little direct con- 
trol over the behavior of its conductors and motor- 
men. For this reason, it is a very much simpler 
matter for the directors of a lighting company to 
keep the public happy than for the directors of a 
street railway company, which by the way, is a 
very important factor, and is probably the factor 
which has caused many to prefer lighting securities 
to street railway securities. 

However, the securities of a lighting company 
should always be kept within the replacement 
value, and investors or the banking house upon 
which the investor depends, should take great care 
to see that the franchises are properly written and 
do not expire until after the bond issues mature. 



LIGHTIXG SECURITIES 213 

In many ways, this is more important in lighting 
companies than in street railway companies, for 
lighting companies are much more suhject to com- 
petition. This is especially true in the case of an 
electric company which has not its wires under 
ground, as it is very easy in such cases for other 
interests to erect a competitive '^overhead" plant. 
The fact that gas pipes are located under ground is 
one of the reasons why gas companies are so little 
subject to competition and gas securities have been 
so popular. In the same way, the placing of elec- 
tric wires under ground by the more conservative 
electric companies is greatly adding to the strength 
and stability of electric lighting securities. 

Regarding the franchises of different companies, 
these vary with different states. Usually they are 
the same as in street railways, but in the State of 
California it is different. The California law 
gives the company the right to do business in any 
of the municipalities within the territory served, 
for a period extending to the end of the company's 
corporate existence, usually fifty years. By the 
terms of this law, the company is not obliged to 
obtain permission from the municipalities them- 
selves, as that right is given in its charter. The 
company is, however, obliged to comply with such 
police restrictions as may be necessary regarding 
the tearing up of the various streets in the munic- 
ipalities in which the company operates. The 
privilege given by the State is neither perpetual 
nor exclusive ; it simply extends during the life of 
the corporation. When the corporation's charter 



214 BONDS AND STOCKS 

expires, it is renewed by special act of the State 
Legislature, as was the Hibernia JSTational Bank's 
charter, which recently expired. A new charter 
was granted for a period of fifty years. There 
seems to have been no objection to the granting of 
a new charter to a company operating under this 
law ; but this is no reason why there some day may 
not be. 

The same statements as to earnings and manage- 
ment made in reference to street railway securities 
also apply to lighting securities, especially in the 
case of cities where both the gas and electric light- 
ing interests are identical. It is for these reasons 
that many conservative investors, when purchasing 
stocks of lighting companies confine their purchases 
to stocks of such companies as control both the gas 
and electric lighting of the localities served. Of 
course, when purchasing bonds, this is not so im- 
portant, as all honestly issued bonds of well man- 
aged lighting companies, whether gas or electric, in 
well established cities, should be absolutely safe. 
In fact, if the reader has any doubts as to his abil- 
ity to select such safe bonds, it is only necessary for 
him to follow the rule which has been mentioned 
heretofore, — namely, to select an underlying lien. 
Practically speaking, all first mortgage lighting 
bonds of established companies in growing com- 
munities should be perfectly safe for permanent 
investment purposes, the amount outstanding 
usually being less than the replacement value of the 
property. 



LIGIITIXG SEClTvITIES 215 

Advantages of Lighting Securities. 

Lighting securities have many advantages, three 
of which we will consider briefly. First, there is 
the steadiness of earnings, and the fact that the 
earnings are not adversely affected by business de- 
pression. Although all electric securities have not 
been outstanding many years, gas securities have 
passed through the three great depressions of the 
TO's, SO's and the 90's. Instead of the earnings of 
these gas companies declining during such periods 
as did the earnings of all railroad and industrial 
corporations, they have steadily increased, and elec- 
tric securities w^ould have had the same experience. 
In fact, the earnings of all lighting companies are 
even less dependent on business conditions than are 
the earnings of street railway companies. 

Second, we have the central control mentioned 
above whereby the manager, sitting in his office 
knows exactly what service every customer in the 
city is receiving, owing to the elimination of the 
personal labor factor. In connection wdth this 
advantage there is another, namely, that lighting 
companies are not affected by strikes, the labor 
factor being a very unimportant factor. In the 
case of all steam railroads and street railways, the 
labor factor is very important, not only owing to 
the effect on the public but also owing to the effect 
on the earnings, as men are continually ashing for 
an increase in pay, and in many instances, the 
labor costs increase at a greater rate than the earn- 
ings. In the case of lighting companies, the labor 



216 BONDS AND STOCKS 

item is very small, and not only have the companies 
nothing to fear from strikes, but they are fully able 
to meet all legitimate demands for increased sala- 
ries. This is a very important factor and one 
which is liable to become increasingly so as years 
go on. 

The third distinct advantage of lighting, and in 
fact, all public utility securities, lies in the feature 
that such a company cannot go bankrupt and 
retire from business. An industrial or manufact- 
uring corporation can at any time close up and the 
business may become almost a total loss. This is 
one of the reasons why industrial bonds are usually 
not in public favor. The value of industrial se- 
curities is very dependent upon the energy and 
constant vigilance of the management, which is 
continually subject to the keenest competition. In 
the case of lighting and other public utility pro- 
positions, the courts have ruled that the companies 
cannot arbitrarily shut down and go out of busi- 
ness even if their management for some ulterior 
motive, so desires. The properties must be oper- 
ated by some one and a total loss is almost impos- 
sible in the case of public utilities. 

Of course, when purchasing lighting securities 
on distant properties, great dependence must be 
placed upon the integrity and good will of the bond 
house purchasing the same, as it is impossible for 
the investor to inspect the franchises, legal proceed- 
ings, location of plant, local environments, manage- 
ment and the other factors. The following sugges- 



LIGHTIXG SECURITIES ^ 217 

tions, however, prepared bj a dealer in public util- 
itj securities are of interest. 

'^In selecting bonds of public utility companies, 
care should be taken to buy issues where the total 
amount of the bond issue is limited and outstand- 
ing (commonly known as a closed mortgage) and 
is not excessive. The following figures or con- 
stants may be safely applied in determining this 
point: For gas companies alone, the bonded debt 
should not be over $15 j^er capita ; electric lighting 
and power companies not over $20 per capita ; 
water companies, not over $25 ; gas and electric 
combined, not over $35; gas, electric and water 
combined, not over $60." 



CHAPTER XIII. 

TELEPHONE SECUEITIES. 

AS we have discussed the securities of street 
railways and lighting companies in preced- 
ing chapters and are now about to consider 
telephone securities, it is rather interesting to note 
approximately the extent to which each of these 
public utilities is a tax upon the people. 

Annual Charg'es Per Capita in the 
United States. 

Steam Railroads $20.00 

Street Railways 8.50 

Gas 3.50 

Electric Light 2.60 

Telephone 1.76 

This does not necessarily mean that every person 
spends $20.00 a year on railroad fares and only 
$1.75 on telephoning; but it does mean that for 
every $1.75 spent on telephoning in this country, 
$20.00 is spent on railroad fares or freight. As 
in economizing, it is natural and easiest to curtail 
first those disbursements which are heaviest, econ- 
omizing last on those which are smallest, it is found 
that the earnings of telephone companies are less 
affected during periods of depression than the earn- 
ings of any other class of corporations. It is 
greatly due to the credit of Mr. Yail, president of 
the American Telephone & Telegraph Company, 
that most careful studies have been made of this 



TELEPHONE SECURITIES 219 

and other features in order to determine the effect 
which a business depression has upon the earnings 
of telephone companies. These studies not only 
show that there has heretofore been no decline in 
telephone earnings during a period of depression, 
which is also true in the case 'of the earnings of 
certain other public utilities, but there has been a 
continuous increase in earnings throughout such 
periods. By tables prepared by the Statistical 
Department of the American Telephone & Tele- 
graph Company, its president has been able to dem- 
onstrate conclusively that telephone earnings are 
the most stable of any class of corporations, and 
therefore, the securities (especially the bonds of 
certain telephone companies) should be attractive 
to the most conservative investor. 

Telephone Competition. 

As has been often emphasized, there is no class 
of securities which has all the advantages or all the 
disadvantages, and telephone securities are no ex- 
ception to the rule. Although the record of tele- 
phone earnings shows a continual and marked 
increase, yet telephone companies have been sub- 
jected to fierce competition owing to the fact that 
competitive plants can be installed so cheaply, 
especially in the smaller cities where wires can be 
placed largely overhead. It is true that this com- 
petition is theoretically against public welfare. 
An ideal telephone system should be universal, and 
all the various exchanges should be so bound to- 
gether by toll lines that there is ample provision 



220 BONDS AND STOCKS 

for intercominunication between all commuiiities. 
Any telephone system failing to meet these require- 
ments falls short of satisfying the public. Never- 
theless, notwithstanding this fundamental princi- 
ple, a host of independent companies has sprung 
up all over the country so that there was a time a 
few years ago when the total number of ^'Inde- 
pendent" telephones exceeded the total number of 
Bell telephones. This has resulted in fierce com- 
petition both as to rates and service. 

A city where the Bell telephone has been the 
sole company, for example, charges nearly fifty 
dollars a year for a house telephone private line. 
An independent company is organized which starts 
out with a rate of about twenty dollars a year for 
the same service, or less than one-half that of the 
Bell company. Of course, the Bell company may 
have been charging too much, but the independent 
company doubtless is charging too little to provide 
for proper maintenance, depreciation and over- 
head charges. The Bell companies have wisely 
very seldom come down to as low rates as the In- 
dependent companies ; but in instances like the 
above mentioned, the Bell sometimes cuts from 
fifty dollars to about thirty dollars. Of course, in 
the case of a family having only one telephone, this 
is an apparent saving; but as a large number of 
families and especially all business houses, under 
such circumstances, are obliged to install both tele- 
phones, the total cost is in excess of the cost under 
the one company, the subscribers being also sub- 
jected to the double nuisance of always finding that 
the party desired has ''the other phone.'' 



TELEPHONE SECURITIES 221 

The local Independent companies have been 
greatly aided by the fact that they have been owned 
and operated by local interests and thus have been 
referred to as the ''home company," while the Bell 
companies have been represented as being operated 
by ''Wall Street" and "some hard-hearted eastern 
capitalists." Under these conditions the independ- 
ent systems have rapidly grown so that, although 
twenty years ago the Bell Company did nearly 
ninety per cent of the business and moreover has 
increased its clientele with most rapid strides every 
year since, yet the Independents have grown very 
rapidly. The Bell system proper comprises about 
30 companies, and operates about one-half of the 
total number of stations, although over 8,000 
friendly companies or lines operate about 1,500,000 
stations. The remaining telephones are operated 
by about 17,000 smaller companies with an average 
of about 75 telephones per company. The com- 
panies are made up largely of small rural associa- 
tions along co-operative lines, and in many cases do 
not in any way compete with the Bell system ; but 
rather tend to become feeders. On the other hand, 
there are over 200 companies which have on the 
average about 5,000 stations to each company, and 
these companies are a source of great trial and 
annoyance to the so-called "Bell interests." In 
fact, it is very interesting to see what the American 
Telephone & Telegraph Company in an official 
bulletin says relative to these companies. 



222 BONDS AND STOCKS 

"The scattered localities, lack of comprehensive 
toll lines, diversity of methods, and variety of ap- 
paratus make it impossible to form these companies 
into a system in the sense that the term is 
applied to the Bell System, although there is much 
talk and some little attempt at doing this to the 
contrary. These companies may be formed into 
three groups: — 

^^Group I. Companies of less than $500,000 
capital, that may be termed legitimate companies, 
started for the most part to fill a real or fancied 
want by local interests, conservatively organized 
and operated. Many of them are not active com- 
petitors of the Bell ; most of them were started with 
the belief that low rates are profitable. Some 10 
per cent have failed in the last few years, or as soon 
as the plant wore out, while most of the others 
acknowledge that rates must be raised before any 
profit can be made. This group numbers about 
150 companies, with total outstanding capital 
obligations of $25,000,000, and some 250,000 sta- 
tions, or about $100 capital per station. 'Not hav- 
ing any considerable amount of toll lines, this cap- 
italization is high, but reasonable. 

"Group II. Companies with a capital of 
$500,000 to $1,000,000. There are 35 of these 
companies, with a total of $20,000,000 capital out- 
standing, claiming 108,000 telephones capitalized 
at $185 per station. Considering that this covers 
but small proportion of toll lines, it is absurdly 
large. 

"Group III. Companies with $1,000,000 capi- 



TELEPHONE SECURITIES 223 

tal. There are 38 of these companies, with a total 
outstanding capital of $185,000,000, chaiming 
764,000 stations, or a capitalization of $2-i2 per 
station. The remarks about over-capitalization 
above will apply with greater force here. 

^^Groups II and III comprise what may be 
termed ^promoted companies.' That is, companies 
formed ]yy syndicates, independent of or connected 
with manufacturing companies, that finance them 
through construction companies as a rule, and dis- 
tribute the stock, when possible, to local or outside 
people. They were not formed to fill any definite 
want, and were built under franchises promising 
low rates and large profits, — seemingly a ridiculous 
proposition, but at the same time sufiiciently at- 
tractive to have enabled the promoters to distribute 
something like $200,000,000 (nominal) of securi- 
ties. 

"The history of these groups is similar, — ap- 
parent prosperity so long as the plant was new or 
securities w^ere readily absorbed, then trying or 
calamitous times, application for higher rates, re- 
organizations, etc. The percentage of failures on 
these groups has been from 15 to 20 per cent in the 
last few years. The probability is that the stations 
claimed are not what might be called legitimate 
subscribers. One of the largest companies lately 
still in process of organization stated to its bond- 
holders that out of over 11,000 subscribers 3,800 
refused to pay and ordered the telephones out, 
3,000 could not afford to have telephones and had 
not paid, and 4,200 were paying $30 per year, or 



224 BONDS AND STOCKS 

less than half the published rates. Few of such 
companies are paying dividends, and fewer of them 
show anything earned after taking care of the 
plant, while most of them are paying fixed charges 
out of capital obligations. 

"As before remarked, over-capitalization, insuffi- 
cient provision for deterioration of property in 
addition to current repairs, low rates, and the lack 
of intercommunication are sloAvly, but surely, 
bringing these companies to grief. The latter alone 
would do so, independent of any other cause. 
Intercommunication is the life of our social and 
business organization, and a universal system ia 
the only one over which comprehensive intercom- 
munication can be had. 

"The public is thoroughly imbued with the idea 
that one system is the best system, but some argue 
that competition is needed to keep the business 
within bounds. In these days of official regulation, 
however, it is questionable whether there is need 
of competition. Regulation and competition can- 
not work together. Regulation would demand 
equal service and equal conditions of each com- 
petitor. There is no such competition in the tele- 
phone business, and to establish such competition 
is probably impossible. But independent of that, 
is there such a thing as competition in the telephone 
business ? To build a telephone exchange in the 
centre of an existing system and give limited ser- 
vice over a restricted area is not competition, at 
least not the sort of competition that is talked about 
by its advocates." 



TELEPHOXE SECURITIES 225 

Of course, this is the Bell side of the story, and 
it is given here only because most readers through- 
out the great West and Middle West hear only the 
independent's side. It is, of course, much more 
popular to talk in favor of the Independents as 
all who are filled with good, red, American blood 
like to be "independent" and fight. The above 
statements are doubtless prejudiced and exagger- 
ated, nevertheless, before investing one's hard 
earned savings, it is well to hear both sides of a 
story; and, however much the above may be exag- 
gerated, the investor might well "count ten" before 
investing in new small "home" or independent tele- 
phone companies. 

Selection of Telephone Securities. 

As in the selection of street railway and lighting 
securities, the question of franchise and replace- 
ment value, earnings and management must be 
carefully considered. We do not hear much about 
the franchise in the case of telephone companies, as 
it is not yet time for the important franchises to 
expire. Moreover, certain telephone franchises are 
more after the style of steam railroad franchises, 
and are not so dependent upon local authorities as 
are the street railway and lighting companies. On 
the other hand, the time is coming when terms and 
expirations of telephone franchises may cause a 
great deal of discussion. Therefore, investors 
should confine their investments in telephone secur- 
ities to such as where the franchises have been most 



226 BONDS AND STOCKS 

carefully examined and approved, and be prepared 
for government ownership any time. 

The same remarlcs apply to the replacement 
value, hut to a much greater extent. In fact, it is 
clouhly necessary that the replacement value of a 
telephone plant should he very much more than the 
honded indehtedness owing to the great deprecia- 
tion involved in telephone plants. Therefore, con- 
servative investors select telephone honds of com- 
panies where the honded deht is only about half 
the cost of the property. 

When discussing earnings and management, this 
brings one back again to the subject of competition 
mentioned above. Given an honest management 
in a fair sized community, there is no reason why 
a telephone company cannot pay a reasonable re- 
turn on the amount invested, provided it has the 
field to itself; but when one-half of the business 
must be turned over to another company, then it is 
very uncertain whether both companies can long 
continue to be successful. In every community 
served by two companies one of these companies 
assumes the lead. Sometimes it is the Independ- 
ents and sometimes it is the Bell, but one is 
almost always forging ahead more rapidly than the 
other. 

Those bankers who advise the purchase of only 
Bell securities or those who advise the purchase of 
only Independent securities, are unwise, as much 
depends upon the locality. In the city of St. 
Louis, the bonds of the independent or local com- 
pany stand very high and are considered by many 



TELEPHONE SECURITIES 227 

as safer investments than the bonds of the Bell 
telephone company operating in that territory ; but 
throughout Xew York State and Pennsylvania, the 
Bell securities stand as a rule, much higher than, 
the securities of the independent companies. 

It does not seem fair to assume that the Bell 
interest will not permit any of its companies to 
default on their obligations. Although the old Erie 
Telephone & Telegraph Company was not a Bell 
company in the full sense of the word, nevertheless 
the Bell interests owned a large proportion of the 
stock, and the securities of the Erie Telegraph & 
Telephone were purchased by 'Ne^Y England in- 
vestors largely on the theory that it was a Bell 
company. Therefore, it was quite a shock to these 
investors to have this stock decline from $122 per 
share to $15 per share in about two years' time. In 
fact, had it not been for the heroic efforts of a 
prominent bond dealer' of Chicago, who represented 
the bondholders in their struggle to force the Bell 
interests to terms, even the bondholders would have 
been obliged to assume a distinct loss. 

In short, telephone securities have so many dis- 
tinct advantages, that were it not for this continual 
warfare between the Bell companies and the In- 
dependents, telephone securities might today be the 
very choicest form of investment. As long as this 
competition exists^ however^ great care should he 
exercised in their selection, and the conservative 
investor will confine his purchases to securities of 
the largest and strongest companies. In addition 
to the factors mentioned in connection with other 



228 BONDS AND STOCKS 

public service corporations, there should be an 
examination into the physical and political side as 
well as the financial. 

Physical Property. 

One should make a careful examination into the 
extent and condition of the physical property in 
order to ascertain whether the bonded debt is se- 
cured by property having a real market value in 
excess of the face amount of bonds issued. The 
extent and valuation of the company's real estate 
is the first point to be determined. If the ap- 
praised value of the land upon which buildings 
have been erected is alone greater than the amount 
of bonds outstanding, it is useless to investigate 
further, for the bonds, in such a case, would be 
practically a real estate mortgage. Seldom, how- 
ever, is this the case ; and after careful appraisal of 
the real estate, it is then necessary that a careful 
valuation be made of the physical property, such as 
copper wires, conduits and equipment. 

The average investor usually finds it an impos- 
sibility to make such an examination himself, and 
it is likely that he would not possess sufficient 
technical knowledge to render his investigation of 
much value. For an accurate estimate of the value 
of a telephone company's physical property, it is 
necessary to depend upon an established bond 
house which will obtain such information by the 
employment of trained engineerSo Owing to the 
length of time that statistics have been available 
for railroad and other public utility companies, 



TELEPHONE SECURITIES 229 

tliey can be properly judged by the careful in- 
vestor; but satisfactory comparative figures rela- 
tive to telephone companies are not available. 

Especially should investors refuse to consider the 
cost of property and equipment as shown by the 
companies' books, for the actual replacement value 
is the only safe figure to consider. Of course, 
many companies having expensive conduits have 
been so liberally maintained, that the replacement 
value of the property is greater than the book value, 
but in most instances, this is not the case owing to 
the rapid deterioration of all over-head construc- 
tion work. If the examination shows that the 
property could not be duplicated for an amount 
one-half or two-thirds in excess of the bond issue, 
this is a very strong point in favor of the bonds. 

In many cases, however, it will be found that the 
bond issue is in excess of the value of the real 
estate and the replacement value of the physical 
property, the franchise having been capitalized. 
To determine the real value of the franchise is a 
very difficult matter, and involves many compli- 
cated, legal and political questions. As heretofore 
suggested, every franchise has its distinct value, 
and there are many franchises which are extremely 
valuable ; but the conservative investor should not 
count on this value when considering the liquida- 
tion value of a property. A franchise is of value 
only because it enables a corporation to make 
money, and if a corporation's earnings under a 
given franchise are not sufficient to pay the inter- 
est on its bonds, there is little real value to the 
franchise. 



230 BOISTDS AND STOCKS 

Telephone Company EarningSo 

If the company whose bonds are being considered 
passes these tests satisfactorily, that is, if its re- 
placement value is sufficiently in excess of the 
amount of bonds outstanding, and the franchises 
are satisfactory, an examination of the company's 
financial condition and earnings should then be 
made. First, the gross earnings should be exam- 
ined for a number of years back to ascertain 
whether the growth and rate of increase is satisfac- 
tory, considering the population served, and 
whether this increase compares favorably with that 
of other companies operating in similar territory. 
The position in which the company stands for 
obtaining new business should also be noted, and 
especially its position for holding its present busi- 
ness, should it be subjected to a great degree of 
competition. 

The next item to consider is the net earnings, and 
this involves a study of the operating expenses. In 
this connection, the relations of the company to the 
public are of great importance, and it should be 
ascertained whether the directors of the company 
follow the policy of conciliating or ignoring public 
sentiment. The payments of a telephone company 
should be analyzed to determine whether sufficient 
capital has been spent and is to be expended for 
renewals, extensions and other improvments suffi- 
cient to keep the property in a high state of effi- 
ciency. This is a question which has caused much 
discussion in telephone circles ; but certainly unless 



TELEPHONE SECURITIES 231 

proper allowance is made for depreciation, it is 
only a question of time before the strongest com- 
pany will become bankrupt. 

Deterioration of plant and equipment, wbicb 
goes on constantly, can be offset only in two ways. 
One is out of earnings, and the other is out of the 
security holders ; that is, by a decline in the market 
value of the securities, and in this connection, a 
writer states as follows : ^'It is difficult to measure 
depreciation accurately, but a safe rule to follow is 
to write off ten per cent of gross earnings each 
month for depreciation. In this way, the charge 
for depreciation will be proportionate to the busi- 
ness, which provides automatic adjustment. If 
the net earnings, after making this allowance for 
depreciation, and after providing all expenses of 
operation including ordinary repairs, amount to 
over twice the interest charges upon the bonds out- 
standing, it is probable that the bonds may be pur- 
chased with safety. 

'^Before finally determining the question, how- 
ever, certain political factors must be taken into 
consideration. The relations of the company to the 
leaders of the dominant, political party must be 
investigated, as well as the likelihood of agitation 
looking toward a reduction of rates. The probable 
attitude of the legislature and municipalities on the 
question of renewing the franchises when they ex- 
pire — or if the terms are broken — must be con- 
sidered. In general, it must be learned whether 
any real ground of contention exists between the 
company on the one hand and the public and its 



232 HOXDS AND STOCKS 

representatives on the other, because it is inevitable 
that the company will Aveaken its independence of 
position by too close a connection v^ith politics, and 
that the physical property will suffer if there is 
any lack of uninterrupted attention to it." 

As in all new enterprises, speculation has run 
ahead of the reality, while financing, built upon 
over-sanguine calculations, has had difficulty in 
squaring accounts when brought face to face with 
facts. In most of the calculations, insufficient 
allowance has been made for the wear and tear of 
service, in other words, for renewal. After a few 
years' test of earnings against expenses, it has be- 
come evident that a proper allowance for deprecia- 
tion of plant w^ould show a heavy deficit in the in- 
come account ; as in most cases no allowance or only 
a meagre one has been made. For a time, this 
method of bookkeeping proved less disastrous than 
might have been expected owing to the rapid growth 
of population and business in American cities. It 
has also been possible in many cases to consider the 
enhanced value given to the franchise by growth of 
business as an offset to the depreciation of equip- 
ment. So far also as the plant was kept up to a 
high degree of efficiency by charging the expense of 
repairs to operation expenses, the absence of a 
depreciation account w^as partially offset. This, 
however, will suffice only for a limited period, and 
all telephone companies must sooner or later meet 
the real problem of providing for very heavy main- 
tenance and depreciation charges. 

As a general rule, telephone bonds in common 



TELEPHONE SECURITIES 233 

with the obligations of all public service corpora- 
tions sell upon about the same income basis as high 
grade industrial bonds — that is to say under nor- 
mal conditions, they return considerably more than 
railroad or municipal bonds. It is difficult to speak 
of the convertibility of public utility bonds as a 
class, for the reason that they differ widely from 
one another in this respect. In general it is cer- 
tainly more difficult to dispose of public utility 
bonds than railroad bonds ; and with certain excep- 
tions, they do not possess sufficient convertibility to 
justify their purchase by any one who may need to 
realize quickly on his holdings. 

Public utility bonds, except such issues as are 
convertible into stock, possess little prospect of 
appreciation in value. It was pointed out above 
that depreciation is not properly allowed for and it 
is very difficult for the securities to advance in the 
face of this obstacle. The bonds of public service 
corporations, however, are relatively more stable in 
price than railroad bonds because their earnings 
are not subject to the fluctuations which occur in 
railroad properties between years of prosperity and 
years of depression. Therefore, public utility 
bonds are very good for permanent investment pur- 
poses, although it should be pointed out that their 
stability of price is largely due to the comparative 
inactivity of the issue. 

A partner in one of the large ^ew York bond 
houses which deals in public utility bonds, has 
made some remarks concerning this class of securi- 
ties which especially apply to telephone bonds. 



234 BONDS AND STOCKS 

Although these remarks are rather pessimistic, yet 
they are well worth repeating. 

''The question remains, do public utility bonds 
afford a desirable security for the investment of a 
business su.rplus and of trust funds ? In regard to 
the former, it may be said at once that public 
utility bonds do not meet the necessary conditions. 
The security is too doubtful and the convertibility 
features are not sufficient. For private invest- 
ment, however, the case is somewhat different. 
Keeping in mind the desirability of diversifying 
investments and admitting the attractiveness of 
investing in a class of property 'whose earnings are 
comparatively stable, it seems clear that public util- 
ity bonds cannot be dismissed without considera- 
tion. When a company is found whose property is 
substantially greater in real value than its bonded 
debt, whose allowance for depreciation is ample, 
whose franchises are satisfactory, whose earning 
capacity is large, and whose management is capable 
and upright, the investor is justified in giving care- 
ful consideration to its issues. Unless all these 
points are found to be satisfactory, however, the 
investor should content himself with some other 
form of security. For some years to come, it is to 
be feared that many of our public service systems 
will suffer from the war of discordant elements — 
disregard of the rights of the public on the part of 
the management, and socialistic agitation for con- 
trol on the part of the community." 

Therefore, until these warring factions are recon- 
ciled and the questions at issue adjusted with fair- 



TELEPHONE SECURITIES 235 

ness to the security holders and the public, the 
investor should be most prudent in his purchase of 
public utility obligations, although nearly all un- 
derlying liens and certain other issues of estab- 
lished properties should be perfectly safe. Bonds 
of such properties constitute a safe investment pro- 
viding they conform to certain stringent require- 
ments. They yield more liberally than municipal 
and railroad bonds of equal security. But it is 
important that purchases of bonds of any class be 
made only after careful study. This especially 
applies to telephone securifies, and the telephone 
companies must surely some day be sold out to the 
government or else be subject to government com- 
petition. 



CHAPTER XIV. 

WATER POWER SECURITIES. 

COAL will slowly continue to increase in value 
until it becomes exhausted. The eastern 
mines are continually being depleted while 
the western mines are continually being developed 
farther from the manufacturing centers. The cost 
of transporting this coal is gradually increasing, 
and in fact, everything tends to make coal, the 
present source of power, more expensive. IsTot 
only, however, is the supply decreasing, but the 
demand is increasing, which tends still more to 
increase the price of coal. 

This decrease in the world's coal supply coupled 
with the development of alternating electric cur- 
rent and high voltage transmission has turned the 
attention of the public utility companies to the 
development of water powers. Unlike coal prop- 
erties, the expenses of which (per ton mined) 
should continually increase, the expenses of a good 
water power development (per horse power) should 
not increase but rather, until the plant is produc- 
ing its maximum output, should tend to decrease. 
This is principally due to the fact that very little 
labor is required to operate a water power plant, 
some half a dozen men being all that is necessary ; 
second, it is needful to purchase only very few 
commodities, the principal item being oil for the 
machinery ; and, third, because the total interest on 



WATER POWER SECURITIES 237 

the investment is a fixed amount. As the output 
of the plant increases until it is producing its 
maximum output, these interest charges per horse 
power will decrease. Therefore, while the value of 
the coal properties of the country is continually 
decreasing, the value of the water power of the 
country is gradually increasing. 

It was an appreciation of these facts and the 
fear that possibly the day might arrive when the 
owners of our water powers would have the only 
practical source of power supply, that so stirred 
ex-President Eoosevelt, ex-Secretary Garfield, Mr. 
Pinchot and others to the conservation policy in 
which they are so much interested. In fact, it has 
been said that this question: "Who shall control 
our water powers ?" was one of the principal rea- 
sons, if not the chief reason at the bottom of the 
Ballinger troubles. These men saw the great 
strategic position which the owners of the nation's 
water powers may some time hold, and thus strove 
to retain as many as possible of these powers, espe- 
cially the undeveloped powers of our great West. 

^Notwithstanding the fact that the water powers 
of the country will have a great future value, there 
exists in the minds of the public in general an 
exaggerated idea of the present value of these 
powers. With the great improvements that have 
been made in boilers, steam engines and electric 
generators, and with the great strides that have 
been made in the design of power stations, distrib- 
uting lines and the apparatus by which the con- 
sumer utilizes electric power, the cost of electric 



238 BONDS AND STOCKS 

power generated by steam, even though the cost of 
coal has continually increased, has during the past 
twenty-five years gradually been reduced. How 
long this will continue it is difficult to foretell. A 
limit, of course, will finally be reached. 

It often costs considerably more today to con- 
struct a water power development and build the 
long transmission lines which conduct the power to 
its market than it does to construct a steam power 
plant at that market. Although the cost of opera- 
tion is less for a water power plant, it will be found 
in the final analysis, if we take into account the 
greater interest charges on the investment, etc., 
that the cost of electric power, delivered to the 
consumer, is not at the present time so very much 
less, when generated by water, than when generated 
by steam. This means that the margin of profit in 
water power undertakings is not as great as is 
generally supposed. Owing to the high regard, 
however, in which water power securities are held, 
the securities of many of these companies now sell 
at fairly high prices. The reader should therefore 
be primarily interested in selecting a safe invest- 
ment from some of the newer companies ; he should, 
however, use even more care in selecting water 
power bonds than in selecting railroad, industrial 
or other public utility bonds and should not assume 
that because it is a water power, it must necessarily 
be a profitable undertaking. 

Five Points to Consider. 

Therefore, when a bond salesman offers water 
power bonds, he should be willing to sit down and 



WATER POWER SECURITIES 239 

systematically analyze different issues for his 
clients and select the one which best passes the fol- 
lowing five tests : 

(1) Are the water rights secure, and have the 
-fiowage, lands and other rights heen legally ac- 
quired. Upon a recent examination of a certain 
water power in the West, it was found that although 
the power company is noAV using the stream, yet a 
certain irrigation company has the right to divert a 
large proportion of this water from the river above 
the power company's development, if at any time it 
so desired. Although there is no danger whatever 
of this irrigation company doing so at the present 
time, yet, owing to the fact that they have a right 
to divert some of the water, the bond issue on this 
development was not endorsed. It is, therefore, 
very necessary for the bond house financing the 
proposition to make a very careful examination of 
all the water rights and privileges ever issued in 
connection with the stream, as well as the various 
other legal questions involved. That is to say, 
there is much more need of careful legal research 
in connection with the construction and develop- 
ment of a water power than is necessary in connec- 
tion with the development of other public utilities. 

(2) Is the primary 2 If hour power of sufficient 
size to maJce the proposition permanently profit- 
ahle, and can this primary power he obtained luith- 
out storing an abnormally large amount of water 
or without relying on a reserve steam plant. The 
examination of a water power in Pennsylvania 
which was very near a large city, and which had 



240 BONDS AND STOCKS 

every advantage, such as a high fall, good market 
for the power, stone bed for the dam, etc., brought 
out the fact that it was too small to permit of an 
economical development. The cost of a water 
power development per horse power is much less 
for large developments than for small. The size 
of dam required is not at all proportional to the 
power developed, and the transmission lines cost 
nearly as much in the case of a small development 
as in the large one. It may readily be seen, there- 
fore, that the fixed charges on many of the small 
developments may be so large that the plant cannot 
possibly be operated at a profit. 

Of course, in the olden days with the wooden 
dam, a power of only a few hundred horse power 
was looked upon as a good asset. In fact, it was a 
good asset for a grist mill, a saw mill or possibly a 
woolen mill; but for profitable, electrical develop- 
ment the horse power should be numbered by thou- 
sands instead of hundreds, l^ot only should the 
primary power be of sufiicient size to make the 
project profitable, but this primary power should 
be obtained largely from the natural fiow of the 
river without relying on additional storage reser- 
voirs. The reservoir created by the dam at the 
development should be large enough to regulate the 
daily fluctuations in the fiow of the river, but if 
additional reservoirs are required the total cost of 
the development may be excessive. 

A project in California was recently ex- 
amined which contemplated — on account of the 
wide variations in the flow of the river— the use on 



WATER POWER SECURITIES 241 

the main river and its tributaries of -^ve large 
storage reservoirs together with a system of ditches. 
Mot only was the cost of this development prohib- 
itive, but so many reservoirs and ditches made the 
reliability of the power very questionable. 

Again, the primary power should be obtained 
without relying on a steam plant. Xot only will 
the cost of the steam plant greatly increase the to- 
tal cost of the development but the cost of generat- 
ing the electricity from the combined steam and 
water power plants will also be greatly increased. 
In nine cases out of ten, advice should be given 
against investing in any water power project which 
required the construction of a steam plant to make 
up the deficiencies in the water power, 

(3) Are there records of the stream hy days 
for a period of five years. This is very important. 
\Yhen making an examination of a stream, a bond 
house may find its flow of sufficient volume to 
develop a very large horse power and all of the 
neighbors living in the vicinity of the stream may 
swear that the stream is always ^^practically" as 
high; but engineers have found that people 
(although honest) are very forgetful, and it would 
be unwise to endorse any water power proposition 
on a stream which has not had government reports 
thereon for at least five years back and preferably 
ten years or more. 

Since about 1888 the United States Geological 
Survey has maintained gauging stations on many 
of the important rivers of the IJnited States. The 
number of these stations has been increased each 



242 BOKDS AND STOCKS * 



year so that at the present time they are established 
on most of the important rivers of the country. 
The records of these rivers are found in the Water 
Supply Papers which are published every year by 
that department. From these records, water power 
engineers can figure fairly accurately, if the gaug- 
ings have been made at proper points along the 
river, the amount of power available. The fact 
that there are no government records on any partic- 
ular river under consideration does not necessarily 
mean that no reliable power exists on that river, 
but if there are such records, it does mean that its 
reliability can be definitely determined and its 
value thereby definitely established. 

(4) The character of construction. Is the dam 
huilt on solid rocJc. How are the ends tied. There 
are propositions where the legal rights have been 
properly secured, where there is sufficient power, 
but where the promoters, in order to save money, 
did not adopt the best type of construction, or select 
that location for their dam which would require 
the least amount of construction material regard- 
less of the proper foundations. 

Water power developments are a good deal like 
the little girl who ^^had a little curl and who was 
either very very good, or very very bad.'' A rail- 
road may be abused, but it can only gradually de- 
preciate. A water power, however, today may be 
a great and profitable proposition and tomorrow 
may be entirely wiped out. A dam is either good 
or no good. When it is in place, it is worth the 
million or more dollars which it cost. When it has 



WATER POWER SECURITIES 243 

been washed away, that million dollars is a total 
loss. Two photographs will illustrate this point; 
one of the great Austin, Texas Dam with the 
Colorado Kiver rushing over it at a height of ten or 
twelve feet above the crest, furnishing power for 
lighting the streets and operating the street cars of 
the capital of Texas. It is a beautiful picture and 
represents a conservative investment of about two 
million dollars, of which a citj or corporation may 
well be proud. The second picture, however, was 
taken only a few hours later, but shows the river 
freely running by, with four jagged junks of 
granite masonry projecting from various points in 
the water. In other words, during the few hours 
intervening between the time these photographs 
were taken, the great Austin Dam broke and that 
investment became a total loss. This is but one 
illustration. Reports are received every few 
months from some part of the country of a dam 
that has been washed away, causing a default of 
the interest on the bonds secured by said dam, and 
a reorganization, if a total loss is avoided. There- 
fore, it is very important to purchase water power 
securities only of companies where the engineering 
work has been carried on by men of the highest 
reputation who actually were given a free hand to 
spend as much money as was necessary for a first 
class dam. 

(5) Is there a marhet for the electricity at a 
profitable price. Even if the water rights, the 
amount of power, the history of the stream and the 
character of the construction is satisfactory, there 



244 BONDS AND STOCKS 

is something else to be considered before placing 
one's money in water power developments. The 
Waldorf-Astoria in New York City is probably a 
great financial success ; but erect the same hotel on 
the plains of Kansas, and it is immediately a finan- 
cial failure. Yet many water powers, which, if 
located near prosperous cities, would be very profit- 
able, are being developed in certain out-of-the-way 
localities where it will be years before the power 
can be sold on a profitable basis. Some day it 
probably will be, but how is the interest on the 
bonds to be paid in the meantime ? Power cannot 
be economically transmitted for much more than 
200 miles at the present time. The cost of trans- 
mitting it that distance is not due so much to the 
direct loss of power as to the interest on the invest- 
ment. It costs from $4,000 to $8,000 per mile to 
erect a modern transmission line. If the line is 
200 miles long its total cost will be in the neighbor- 
hood of $1,000,000, the interest charges on which 
at 5% amount to $50,000. Moreover, some of the 
larger water power companies have found it neces- 
sary to erect duplicate lines simply for use in times 
of emergency, for in no other w^ay can they hold 
their trade and furnish power continuously to 
operate the street cars and electric lights. It is 
very evident, therefore, that in order to meet these 
heavy interest charges, a large amount of power 
must be sold and at fairly good prices. 

The E'iagara Falls Plant is an illustration of a 
development which was built without due regard to 
the market. The experience of the Magara Falls 



WATER POWER SECURITIES 245 

Power Company clearly shows that when it is 
necessary to create a market for the power, the 
process is a slow one, for although this company 
has been in existence for many years it has only 
just recently begun to pay dividends on its capital 
stock. 

The Dangers of Over-Capitalization. 

In many states today the issuing of bonds for 
the development of railroads, street railways and 
even electric lighting and power companies are 
subject to state approval. This, of course, does not 
mean that bonds are necessarily good because they 
are approved by the Public Utility Commission of 
Wisconsin, for example, as the commission is not 
called upon to judge the value of the proposition. 
These commissions, however, are a distinct check 
on over-capitalization, and some day they will be 
greatly appreciated by investors. Very few states 
today have any laws regulating the capitalization 
of companies formed for the development of water 
powers. Thus, of the new so-called public utility 
companies which are today being formed, probably 
the most flagrant cases of over-capitalization will be 
found in water power companies. Therefore, in- 
vestors purchasing water power bonds should make 
sure that they deal only with bond houses of the 
highest character, those who have a reputation at 
stake, and who are known by experience to have 
stood back of all their undertakings. . 



24G BONDS AND STOCKS 

Advantages of Water Power Securities. 

There are few things which have a brighter 
future than the securities of some of our proven, 
successful and well constructed water powers 
operating near large cities. The bonds of these 
companies can be purchased to yield about 5 % and 
in some cases more. These should be safe as to 
principal and interest. Moreover, in the case of a 
few of these undertakings, the preferred stocks at 
the present time should be a good investment. But 
this is not all ; not only are many of the bond issues 
as safe as the highest grade railroad bonds, but the 
common stocks of some of these developments which 
are now selling at only a few dollars a share, should 
be very valuable in years to come. 

If a man will take a fund of fifty thousand dol- 
lars and will employ a water power engineer to 
select for him ten or twenty water power companies 
in which to invest, whose common stocks are selling 
at from $20 to $30 a share and will follow the 
advice of that engineer, he will "wake up" some 
day and find that these stocks, for which he paid 
only fifty thousand dollars, will be worth one or 
more millions. Of course, this is not coming quick- 
ly. Between now and the time it does come, many 
present ambitious but impatient holders of these 
securities will become discouraged, get tired of 
waiting, and will sell their holdings. Today may 
not be the time to buy such securities ; but there is 
a time coming when it will be desirable to pick up 
these common stocks here and there, for one hun- 



WATER POWER SECURITIES 247 

dred years hence the men who own our water 
powers will control the industries of America. 
Therefore, when a power is found which stands all 
the tests above given, and has by a few years opera- 
tion proven its ability to make money, and is being 
operated by men who stand for integrity, investors 
will be justified in buying an equal amount of first 
mortaaae bonds and common stock. 



"to^to^ 



Figuring Horse Power. 

Herewith is submitted a brief and simple discus- 
sion of the fiow of a stream and an outline of the 
method used in ascertaining the horse power of any 
stream. This explanation may be of service not 
only to the investor and salesman, but also to the 
o^vner of a small grist mill, or to a farmer who has 
a small stream running through his land. 

The two factors that determine the horse power 
which can be obtained from any stream, are its 
flow and the vertical distance through which the 
water falls. It is a comparatively simple matter to 
determine the latter, but it is not quite so easy to 
ascertain the former. There are three methods of 
determining the flow of a stream; but only the 
velocity method will be discussed. The velocity 
method is the one most commonly used and consists 
simply in measuring at the point where the flow is 
to be determined, the velocity of the current and 
the area of a cross section of the river. The veloc- 
ity of the current is measured either by a water 
meter or by timing a float between two given points. 
The area of the cross section (which is the area of 



248 BONDS AND STOCKS 

a section of water that would be made loj tlie ver- 
tical cut of a knife if you could draw the knife 
through the water across the stream from bank to 
bank, — similar to the area of the section of a loaf 
of bread made by cutting the loaf in two) is ap- 
proximately determined by measuring the depth of 
the water at different points in a straight line di- 
rectly across the stream from bank to bank. The 
product of the velocity in feet per second and the 
area in square feet gives the flow in cubic feet per 
second. 

But the flow thus determined is simply the flow 
at one particular time and does not by any means 
fully determine the flow of the stream. It must be 
remembered that the flow of a stream is not uni- 
form from day to day or from month to month or 
even from year to year. It is usually highest in 
the spring and lowest in the fall or late summer. 
In order to determine fully the power that can be 
developed from a stream, it is necessary to measure 
the flow at different times and to determine its 
variations. This is done by measuring the flow at 
different stages of the stream and by erecting a 
gauge and recording each day the level of the water. 

A record of any stream obtained can be summa- 
rized and set down in a table like the following, 
which is the record of the flow of the Hudson Eiver 
in 1909 taken from the Government Reports: 



WATER POWER SECURITIES 24'J 

Monthly Discharge of the Hudson Eiver at 

Mechanicsville, N. Y. Discharge in 

Cu. Ft. per Second. 

Month Maximum Minimum Average 

Jan. 10,300 1,590 5,210 

Feb. 29,700 3,970 11,600 

Mar. 15,700 5,640 9,220 

Apr. 46,300 11,500 25,800 

May 28,200 7,230 17,000 

June 9,560 2,500 6,020 

July 3,390 1,210 1,980 

Aug. 3,210 235 1,520 

Sep. 2,140 430 1,460 

Oct. 2,270 531 1,560 

l^ov. 2,620 718 1,680 

Dec. 2,550 400 1,570 

The Year 46,300 235 7,050 

This table is an excellent illustration of the 
fluctuations in the flow which occur from day to 
day and from month to month. 

Xow the question is, which flow is to be used in 
figuring the horse power of the stream. Is it to be 
the flow of any particular day or of any particular 
month, or is it to be the maximum flow, the min- 
imum flow or the average flow ? Of course, if we 
wish to ascertain the continuous power which can 
be developed day in and day out, we would use the 
lowest flow. Tbis in 1909 on the Hudson Eiver 
was 235 cu. ft. per second. But the lowest flow 
usually occurs only one or two days in the year. 
On the Hudson River it occurred only one day and 



250 BONDS AND STOCKS 

that day was Sunday when the mills were all shut 
down and the dams along the river were holding 
back the water. 

In constructing a water power development, the 
reservoir created by the dam is generally of suffi- 
cient capacity to regulate the daily fluctuations in 
the flow and to keep the flow continuously, at least 
equal to the lowest monthly average. This is the 
flow on which the primary power of the stream is 
usually figured. In the case of the Hudson River 
in 1909 this was 1460 cu. ft. per second. 

The process of figuring the horse power after the 
height of the water fall and the flow of the stream 
have both been determined is a very simple one. 
The power developed by a waterfall is nothing 
more or less than the power developed in a given 
time by a falling body. A waterfall is simply a 
series of falling bodies. The horse power is, then, 
the weight of water in pounds flowing in one 
second, multiplied by the height of the waterfall in 
feet, and divided by 550 (this being the number of 
foot pounds per second equivalent to 1 horse 
power. ) As the weight of a cubic foot of water is 
approximately 62.5 pounds, the formula for horse 
power in its elementary form is then: 

Horse Power = Flow in cu. ft. per sec, x 62.5 x Height of Fall in ft. 

The horse power thus flgured, however, is the 
theoretical horse power and on account of the losses 
of power in the water wheels and electrical gene- 
rators, can never be obtained in practice. If we 
take these losses, which usually amount to about 



WATER POWER SECURITIES 251 

25%, into consideration, the formula then becomes 
in its simplest form : 

Horse Power^^ ^^"" " ^f ^^ "^ ^"^^ 

Below is the calculation of the 24 hour primary 
power available from the Hudson Kiver in 1909 at 
Mechanicsville, I^. Y. The head of water here is 
18 feet and the lowest avera2,e monthly flow was, 
as given above, 1460 cubic feet per second : There- 
fore, Horse Power=^i^'=2190 



CHAPTER XV. 

MUNICIPAL SECURITIESo 

BE:^JAMI]^ ERANKLIN is reported to 
have said on one occasion something to the 
effect that ^^nothing in life is sure except 
death and taxes.'' According to articles which 
have been published on municipal bonds in current 
periodicals; it v^ould appear that Franklin com- 
mitted a grave error when he omitted municipal 
bonds from this statement Surely municipal 
bonds are founded on taxes, and if taxes are sure, 
then municipals should be sure ; but if so, how do 
we account for the defalcations on municipal bonds 
which periodically take place ? Certainly there is 
a loophole somewhere, and it is the purpose of this 
chapter to show where this loophole existSo 

The word "municipal" comes from the word 
"municipality," which is a general term referring 
to a city, town, and possibly a countyo Originally 
it was supposed to refer only to a city, but it is 
now a general term, and dealers are tending toward 
the practice of calling all bonds which are not cor- 
poration bonds, municipal bondso As every mu- 
nicipality is in reality simply a corporation, deriv- 
ing its authority from a charter received from the 
state the same as every other corporation, mu- 
nicipal bonds might be called corporation bonds. 
However, there is one great theoretical difference, 
namely ; that corporation bonds are dependent upon 
the earnings of a corporation, which may or may 



MUNICIPAL SECURITIES 253 

not be sufficient to pay the interest thereon ; while 
municipal bonds are dependent upon only the taxes 
of the community, which can he increased to any 
amount necessary to 'pay the interest on any legally 
issued municipal honds. l^oi only can these taxes 
be arbitrarily assessed, but this assessment comes 
before the earnings of any corporation. 

For instance, assume that you own one of the 
Boston Terminal Company First Mortgage 
3-1/2% bonds due February, 1947, secured by a 
first mortgage on the great South Station in Boston, 
!^Iass. These bonds are issued by a corporation 
known as the Boston Terminal Company, the stock 
of which is owned by large railroad interests using 
the terminal. If these railroads failed to pay the 
interest on these bonds, it is only necessary for the 
bondholders to foreclose their mortgage and take 
this terminal property, erecting thereon office build- 
ings, apartment houses, or anything that might be 
desired. In other words, holders of these Boston 
Terminal bonds have an "absolute" first mortgage 
on this most valuable property subject to one excep- 
tion. This exception, is that the holders of the 
City of Boston 4% bonds theoretically have a prior 
lien on this great terminal property as well as on 
all other property in the city of Boston and, if at 
any time, the city of Boston should default on its 
own bonds, the holders thereof theoretically could 
unite and assess the Boston Terminal Company 
and all the owners of other Boston property for a 
sufficient amount to pay the principal and interest 
on the City of. Boston bonds. Moreover, if the 



254 BONDS AND STOCKS 

Terminal Company should fail to pay such taxes 
and assessments, the Boston Terminal bondholders 
must voluntarily assess themselves for the payment 
of the principal and interest due the holders of the 
City of Boston bonds. 

The Purpose of Municipal Bonds. 

Like any private corporation, a municipality is 
obliged to borrow money. In making permanent 
improvements, such as building schools, erecting 
fire houses, purchasing land for streets, and many 
other purposes, a city is justified in borrowing 
money by selling bonds, and is justified in refund- 
ing certain of these bonds when they become due. 
For other purposes, such as paving, buying fire 
horses, and making other purchases which rapidly 
depreciate, a city is also often justified in borrow- 
ing money for a short period, but in such cases, the 
bonds should be serial bonds, and arrangements 
should be made to pay up portions of the principal 
each year as they mature from the regular tax 
budget. 

Every year there are about $350,000,000 muni- 
cipal bonds sold, and less than ten per cent are for 
refunding purposes. This means that about $315,- 
000,000 of new money is borrowed every year by 
municipalities of our country for municipal im- 
provements; or, in other words, the total net in- 
debtedness of our municipalities is increasing 
about $315,000,000 each year. 

The following table shows the various purposes 
for which municipal bonds are issued in an aver- 



MUmCIPAL SECURITIES 255 

age year, and the average sum of money which goes 
to the different purposes : 

Water Supply \ . , . . . $50,000,000 

Streets and Bridges . . . . . 75,000,000 

Sewers and Drainage . . . . 30,000,000 

Schools and School Buildings „ . 50,000,000 

General Building . „ » « , 35,000,000 

Parks and Museums , . . o , 12,000,000 

Lighting ..,.,, o o 3,000,000 

Miscellaneous . . . . o . 30,000,000 

Funding and Improvement o o . 30,000,000 



$315,000,000 



During the past few years, municipal borrowing 
has greatly increased, and it is a subject which 
deserves most careful consideration. Some bankers 
feel that our increased mimicipal indebtedness, 
expanding at such a rapid rate, will jeopardize the 
safety of certain municipal issues. This may be 
overdrawn, yet it is a subject worthy of careful con- 
sideration, and certainly the rate of increase should 
be diminished. In short, the sales for each year 
average about 40% increase over each preceding 
year, which is of course, stupendous. The objec- 
tion should not be to the amount so much as to the 
purpose of the issue. The land a city buys for 
park purposes or for laying new streets, or addi- 
tional water or sewerage purposes is not criticized 
for every dollar spent for such permanent improve- 
ments, the city is five dollars better off, but objec- 
tions are well founded when bonds are sold to raise 



256 BOm)S AND STOCKS 

money for macadamizing roads, removing snow, or 
for Fourth of July celebrations. Although theoret- 
ically such bonds are as good as bonds sold for any 
other purposes, yet the ultimate effect upon the 
financial situation, and especially on the city, Is 
vastly different. Of course, any abnormal increase 
in the issue of municipal bonds tends to depress the 
price thereof, and this is the reason why City of 
Boston bonds sell at times cheaper than Boston 
Terminal bonds, although theoretically the former 
are much better. In practice, however, municipal 
bonds are not always better than high grade cor- 
poration bonds. Although theoretically our homes 
can be sold to pay the bonds of our town, unhappy 
will be the men who attempt to do this, and bond- 
holders know that to hold the power is entirely 
different from being able to enforce. Thus they 
are wary of cities and towns which are borrowing 
too heavily. 

The Sale of Municipal Bonds. 

When a municipality desires to raise money for 
any of the above purposes, a vote is passed by the 
aldermen and common council if it is a city, or the 
citizens of a town if it is a town, authorizing the 
treasurer to borrow a certain amount of money at 
a certain rate for a certain length of time for 
definite purposes. This means that the treasurer 
will have bonds printed, and sell them in the 
market by advertising for bids. If the treasurer is 
authorized to raise $100,000 at 4% for twenty 
years, he advertises 100,000 4% 20-year bonds for 



I^IUNICIPAL SECURITIES 257 

sale, and tlie bond house which will pay him the 
most therefor gets the bonds. The following is a 
list of the bidders and the prices which they offered 
for $175,000 City of Cleveland bonds, which were 
recently advertised for sale by the treasurer of that 
city. The report reads as f oIIoavs : 

The $175,000 bonds were purchased by Hayden, 
Miller & Co. of Cleveland and the other issue was 
disposed of to a syndicate composed of the Tillotson 
& Walcott Co. of Cleveland, Stacy & Braun of 
Toledo and the Western-German Bank of Cincin- 
nati. A list of the bidders follows : 



BIDDERS. 



$175,000 $60,000 
Bonds Bonds 



- $178,250.25 $60,342.00 



The Tillotson & Walcott Co., Cleve- 
land 

The Western-German Bank, Cincin- 
nati 

Stacy & Braun, Toledo 

Hayden, Miller & Co., Cleveland " 178,300.00 60,067.00 

The First National Bank, Cleveland 178,279.50 ,' . . 

New First National Bank, Columbus 178,100.00 60,312.00 
Davies-Bertram Co. and Provident 

Savings Bank and Trust Co., 

Cincinnati 177,680.00 60,163.00 

Otis & Hough, Cleveland 1 ,«- _^ __ 

Seasongood & Mayer. Cincinnati... / i77,/9J.OO 60,093.00 

C. E. Denison & Co., Cleveland 177,451.80 60,085 80 

The Cleveland Trust Co., Cleveland "I ,-^ooo^^ .^ 

E. H. Rollins & Sons, Chicago | 1^^,882.00 60,087.50 

The Fifth-Third National Bank, 

Cincinnati 177,940.00 

Mansfield Savings Bank, Mansfield. 177,510.00 ,.., 

The Security Savings Bank and 

Trust Co"!, Toledo 177,327.50 

The Central Trust & Safe Deposit 

Co., Cincinnati 60 324 00 

Harris, Forbes & Co., New York * * * 60^258^00 



258 BONDS AND STOCKS 

This means tliat the city received $178,250.25 for 
its $175,000 bonds and $60,342.00 for its $60,000 
issue; or, in other words, a premium of $3,592.25 
for these two issues. (There also Avas another and 
larger issue sold at the same time ; but figures on 
this are unnecessary. ) When money rates are low 
and bonds are in great demand, cities receive more 
for their bonds than when money rates are high 
and bonds are not in great demand. 

Once there w^as a time when municipal bonds 
could be sold at any price, or to bear any rate, and 
sales w^ere made privately. Any old bondsalesman 
has many most interesting tales to tell relative to 
those days when they 'Svorked" our city treasurers 
more than they worked themselves, and if some of 
our magazines had then been so keen for graft 
articles as they are today, they could have found 
some most interesting material in connection with 
the sale of municipal bonds. 

Before the bond house has purchased the bonds, 
it has the ^^proceedings" carefully examined by 
counsel. As a mortgagee employs lawyers expe- 
rienced in real estate law to examine the title and 
proceedings in connection with the preparation of 
mortgages, so the municipal bond house employs 
lawyers trained in investigating the legality of 
municipal bonds to pass upon each issue before pur- 
chasing the same. In cases of some of the larger 
cities, the treasurer himself employs prominent 
counsel whose word is known throughout the land, 
to pass upon the proceedings connected with the 
issuance of the bonds before the bonds are offered 



IIUNICIPAL SECURITIES 259 

for sale. This, in a way, makes the sale more at- 
tractive, and enables municipalities to receive a 
higher bid for the bonds than they otherwise would. 
As great strides have been made in the sale of 
bonds, so also in their preparation, and now many 
states have provided very careful directions relative 
to the preparation and proceedings for an issue. 
It appears that Texas was the first state to prepare 
comprehensive laws on this subject, and when pur- 
chasing a Texas, municipal bond, one is supposed to 
find a certificate on the back of said issue stating 
that the legal proceedings have been properly com- 
plied with, and that the bonds have not exceeded 
the debt limit. In other words, the Attorney Gen- 
eral's ofiice at Texas, pretends to assume a certain 
responsibility in checking up the legal proceedings 
in connection with issues of all Texas bonds. A 
recent legislature of Massachusetts also enacted a 
law whereby certain municipal obligations should 
be registered at the state treasurer's office before 
being sold to the public. Briefly, this law is as 
follows, and it is one which other states should im- 
mediately copy: 

Chapter 616, Massachusetts Acts of 1910. 

An Act Relative to the Form of Xotes to be Issued 
by Towns for Money Borrowed. 

"Section 1. The director of the bureau of statistics shall 
furnish to the treasurer of every town within the common- 
wealth a book of forms for the issue of notes for money 
borrowed by the town. The note shall state the amount 
thereof, the date of issue, the interest which it bears, and 
the date when it will become due for payment, and record 



260 BONDS AND STOCKS 

of every note so issued shall be kept by the treasurer of the 
town in such form as the director of the bureau of statistics 
may designate. 

"Section 2. Whenever a town votes to raise money other- 
wise than by the issue of bonds to be paid for from a sink- 
ing fund or by the serial method, so-called, the treasurer 
shall make a note or notes for the amount of the proposed 
loan, and shall use one or more in serial order of the forms 
furnished as hereinbefore provided, with the blank spaces 
properly filled in, and shall 'sign the same in the space or 
spaces provided, and a majority of the selectmen shall coun- 
tersign and approve each note in the presence of the town 
clerk, who shall certify to the fact on the face of the note and 
affix thereon the town seal in a space to be provided there- 
for. The treasurer, after making a record of the transac- 
tion in accordance with the provisions of section one, shall 
forward every such note to the director of the bureau of 
statistics, together with a copy of said record, and a copy of 
the vote authorizing the loan, certified by the town clerk, 
and a certification by the town clerk that the person whose 
signature appears upon the note as that of the treasurer was 
the duly authorized treasurer of the town at the date when 
such signatures were made, and that the persons whose 
signatures appear upon the note as those of a majority of 
the selectmen were duly qualified selectmen when such sig- 
natures were made, and he shall at the same time forward 
the fee provided for by section four of this act. If upon 
examination said director finds that the note appears to 
have been duly issued in accordance with the vo^e of the 
town, and to have been signed by the duly qualified officials 
thereof, as herein provided, he shall so certify, and the 
director shall thereupon return the note by registered mail 
to the treasurer of the town. 

"Section 3. Whenever any note issued by a town within 
the commonwealth, whether such note was issued before or 
after the passage of this act, shall have become due and 
shall have been paid, the town treasurer shall immediately 
notify the director of the bureau of statistics of such pay- 
ment, stating the source from which the money to pay the 
same was obtained. 

"Section 4. The director of the bureau of statistics shall 
establish a reasonable fee to be charged for every note cer- 
tified, and shall turn over monthly to the treasurer of the 
commonwealth such fees. 

"Section 5. A town treasurer who violates any provision 
of this act shall be liable to a fine of not less than one hun- 
dred nor more than five hundred dollars. 



AIUNICIPAL SECURITIES 261 

. "Section 6. This act shall take effect on the first day of 
January in the year nineteen hundred and eleven." 

It is true that this law does not yet include bonds 
and other city obligations, but this will be the next 
step. 

Another very satisfactory method which city, 
town and county treasurers may adopt is to have a 
bond issue prepared by a prominent trust company, 
as in several of the largest cities there are trust 
companies which specialize in this work. For in- 
stance, when a town has voted to sell $100,000 of 
bonds, and the treasurer has advertised for bids and 
the issue has been sold, the treasurer can then turn 
the matter over to one of these trust companies, 
which will have the bonds printed on specially pre- 
pared paper (which it is very difficult to counter- 
feit) and arrange the other details. The trust 
company will have the legal proceedings checked up 
by its attorneys, and will then certify on each bond 
that said bond is authorized, and in its opinion, is 
legally and properly issued. Except in certain 
states like Texas where the state authorities attend 
to such details, all town officials should work 
through one of these prominent trust companies 
and thereby save money for their own municipality 
and improve its credit as well as protect the in- 
vestors and prevent any possible suspicion falling 
upon themselves. 

Limitations and Loopholes. 

All municipal bonds are not good, and when not 
high grade, they are not desirable. Sometimes 



262 BONDS AKD STOCKS 

thej are not good from bad faitli, and sometimes 
from changed conditions or other causes ; but usual- 
ly the reason is due to an error in the original, legal 
proceedings, or because they were in excess of 
the debt limit. Eelative to this subject, a well 
known authority on municipal bonds states sub- 
stantially as follows : 

^'The common term in speaking of constitutional 
limitations is that of the constitutional limit of 
debt. That is, we find in a very large number of 
cities that the constitution provides that no muni- 
cipality shall create a debt in excess of a given per- 
centage of the assessed valuation, which percentage 
varies. We find it in some states as low as two 
per cent, in others, as high as 30 per cent. The 
assessed valuation, of course, may be a small per- 
centage of the actual value, or it may be a large 
percentage of the actual value, which is supposed to 
be the selling price of the property. Taking these 
different ratios of assessed valuation as compared 
to actual values, we find it on real estate in 'Ne^Y 
York 100 per cent; Philadelphia 100 per cent — 
(these are according to the latest statistics obtain- 
able) — Boston 100 per cent, Baltimoro 100 per 
cent, Detroit 100 per cent, Buffalo 75 per cent, 
'New Orleans 60 per cent, St. Louis 60 per cent, 
San Francisco 50 per cent, Milwaukee 50 per cent, 
while Chicago has a very low assessed valuation of 
only about 15 per cent. 

The percentage of issues allowed in the constitu- 
tions varies in different states, from two per cent in 
one state to 30 per cent in another. Here are a few 



MUNICIPAL SECURITIES 263 

of the different limitations : 'New York, 10 per cent 
of the real estate assessment ; Pennsylvania, 7 per 
cent of real and personal ; Ohio, 8 per cent of real 
and personal; California 15 per cent; Missouri, 5 
per cent of taxable property ; Indiana, 2 per cent ; 
North Carolina, no limit — each issue requires 
legislative enactment; Michigan, subject to any 
limitation passed by the legislature; and so on. 
We also find in some cases that a popular vote is 
necessary in order that a bond may be legally is- 
sued — a vote in many cases of all citizens entitled 
to vote ; then again we find in some cases that only 
tax-payers can vote, and it requires the male and 
female vote. Moreover, in issuing a municipal 
bond, it must be issued for strictly municipal pur- 
poses. 

It will therefore be seen how very important it 
is that all these legal features be complied with; 
for, if the bonds are not legally issued, the city or 
town can at any time stop paying the interest and 
refuse to pay the principal. But this is not the 
only way that investors lose money by municipal 
bonds. Here is a case of a small city in Minnesota, 
which was to use the proceeds of a bond sale to 
build a bridge over a river. The total issue 
amounted to about one hundred thousand dollars, 
the bridge being quite expensive, but it was not 
erected where the leading business interests wished 
it. The fact that the city had only one important 
business industry ivas the bottom of the ivhole 
trouble. In short, at the beginning of this affair 
some of the politicians of the town voted for cer- 



264 BONDS AND STOCKS 

tain reasons to build this bridge, issued these six 
per cent bonds in payment therefor and the bridge 
was built. After the bridge was built there was a 
change of administration; and the new city offi- 
cials, who were said to have been elected by the 
owners of this certain industry, refused to pay the 
interest on the bonds. As the bonds had been 
legally issued, the bond house which sold them im- 
mediately took the matter in charge and started 
legal proceedings against the city to make its offi- 
cials pay the interest. The courts upheld the bond- 
holders, but still the bondholders were helpless, and 
agreed to compromise. To an innocent investor 
this seems very strange, yet the reason is very 
simple. 

The great industry above-mentioned was then 
practically the only industry in the city, and the 
value of the city property depended on this one 
industry. When this bondholder's committee won 
their case in the courts, the directors of this in- 
dustry simply announced to the committee that it 
would remove its plant elsewhere. As this plant 
amounted to about the total indebtedness of the 
town, the committee thought that such an event 
would cause the city to default on all its issues and 
so immediately withdrew its case, compromised 
with the municipality, and the bondholders ac- 
cepted their loss. The entire assessed valuation 
was only about $1,500,000 and the tax rate is now 
over $40.00 per thousand. The city (for every 
little village is a city in that section) consisted of 
this one plant surrounded by some houses, a preten- 



JMUNICIPAL SECURITIES 265 

tious City Hall and this famous bridge crossing the 
river some distance out of town where no one 
wanted it built except possibly some alderman who 
had some land for sale in that vicinity. 

There should be some way provided for our 
bondholders committees to visit these places before 
purchasing the bonds ; no eastern man would ever 
have bought these bonds if he had first visited this 
lonely, forlorn, western settlement. 

How^ever, municipal bonds as a class should be 
safer than any other kind, although they are some- 
what on the same principle as a note of a relative 
or some dear friend. Probably said friend's note 
is absolutely good ; but if for any reason he did not 
volunteer to pay it, you w^ould never sue him or 
force him to settle. It is the same with municipal 
bonds. Theoretically, they are the ideal perma- 
nent investment and when such municipals are con- 
sidered, in which Massachusetts and ^ew York 
savings banks are allowed to buy, this is practically 
true also. However, the same rule does not apply 
to all western and southern bonds of new and small 
cities nor to ^^special assessment" or "improve- 
ment" bonds of even larger cities. 

Municipals Which are not Municipal Bonds. 

The breaking of a Southern dam, which, 
at the time it was constructed, was one of the 
largest in the w^orld, affords another illustration. 
This dam was erected by a Southern city at an 
expense of about one million dollars, damming 
the Colorado River, for the purpose of generating 



266 BONDS AND STOCKS 

electric light and power and for supplying said city 
with water. It was a great municipal improve- 
ment, and the city was well justified in issuing 
bonds in payment therefor. 

There was no attempt on the part of the city 
officials to dispute the legality of the issue. There 
were no indications of graft, nor were any real rea- 
sons given for the non-payment of the interest. 
The city was not dependent on one industry, 
but is one of the most prosperous cities in the 
Union. E'evertheless, this city flatly defaulted on 
the interest on its bonds and pretended to refuse 
considering even the payment of the principal. In 
short, the officials of that city did not attempt to 
make any excuse but simply said, ^What are you 
going to do about it ?" 

In answer to the assertion that there was one 
thing that the bondholders could do as a last resort, 
namely, ^^to come down and foreclose on the houses 
and stores, selling the same at auction, and so 
obtain the necessary money for the payment of 
these bonds, principal and interest," the reply was 
very brief and to the point. Said they, "Let them 
come as they will, but if they do, we will shoot 
every blasted one of them." This was not the 
sentiment of the best element of the community, 
and in fact, the leading bankers of the town did 
everything possible to aid in arranging a fair and 
just settlement. That "What-are-you-going-to-do- 
about-it ?" spirit however did represent the position 
of the average citizen. Although there is no doubt 
but that the bondholders could have carried out the 



MUNICIPAL SECURITIES 267 

above threat yet they would have needed to call 
out the United States army to do it, and consider- 
able blood would have been shed in that good old 
Southern town before the bondholders received 
their money. 

The dam had broken, the city's supply of water 
and light had been temporarily cut off, there was 
no money in the treasury to pay the interest on 
these bonds, taxes were already fairly high, and the 
citizens simply ^'laid down" and insisted that the 
bondholders must meet them half way and share 
with them the loss, although, as above stated, there 
was no legal, moral, or business reason why the 
bondholders should compromise in any way. 

As to the final settlement, an adjustment of this 
debt on the basis of new bonds bearing three per 
cent for five years, four per cent for the next ten 
years and -^yq per cent for the final fifteen years 
was reached between the city and the bondholders' 
committee. All these bonds have been refunded 
and interest is being regularly paid. 

But this is only one of many illustrations which 
could be given. Another is the case of Galveston, 
Texas. Galveston was a flourishing city. Sudden- 
ly one morning a few years ago, it was swept by a 
tidal wave. The citizens appealed to the country 
for aid and later asked the bondholders to release 
them from their obligations. The attitude of Gal- 
veston was very friendly, and her appeal was such 
that the bondholders felt willing to do something, 
so they agreed to accept a lower rate of interest for 



268 BONDS AND STOCKS 

a certain length of time, to purchase additional 
bonds, and to aid the city in getting on its feet. 

Issues of Doubtful Legality. 

Bonds issued in anticipation of special assess- 
ments levied to provide for improvements upon 
adjoining lands, are known as special assessment 
bonds. Certain of the paving and sewer bonds 
issued by many western cities, towns and counties 
may be classed under this head. Legal decisions 
have been somewhat at variance as to whether such 
bonds are binding upon the whole city or county, in 
addition to the portion specially benefited ; but it is 
now generally conceded that they are not. In an 
Ohio case, the Supreme Court held that when 
between the county and benefited district, 
and the bondholder, the whole county is liable. 
''This decision was in substance paralleled in the 
case of Fort Scott, Kansas, wherein the Supreme 
Court affirmed that inasmuch as the special assess- 
ments upon the property directly held had proved 
insufficient to meet principal and interest on the 
bonds, the holder was entitled, in case of the city's 
default, to a writ of mandamus, compelling the 
levy of necessary taxes on the entire city property. 
Still again in an Indiana case, in 1884, the Federal 
Court held that certain gravel-road bonds, while 
payable primarily from the assessments of the 
adjoining lands on each side, were nevertheless 
obligations of the whole county ^s well, and should 
be considered such in reckoning its indebtedness in 
reference to the two per cent borrowing limit im- 



MUNICIPAL SECURITIES 269 

posed by the Indiana State Constitution. Three 
years later, however, the Supreme Court of the 
same state, perhaps influenced by the narrow debt 
restriction just cited, gave an opposite opinion upon 
the gravel-road bonds. Ignoring the earlier ruling, 
this court held that the funds raised by special 
assessments on the adjacent lands, were, by the 
statute, for the express purpose of meeting princi- 
pal and interest on the bonds, and for this alone — 
while no other provision had been made for their 
payment — that the evident purpose of the legislat- 
ure was to place the burden of the entire cost of the 
improvements upon the owners of the contiguous 
lands, to which the bondholder's claim thus became 
limited. This view, while correct so far as it goes, 
takes no cognizance of the fact that the enabling 
act authorizes the issue of '^bonds of the county/' 
which being empowered to collect the assessments 
for their payment, may perhaps be constructed to 
loan its credit as well." 

A Wisconsin city once issued special assessment 
paving bonds, which, added to its regular indebted- 
ness, exceeded the five per cent constitutional 
limitation. The real status of the bonds thus be- 
came problematical, for upon the theory that they 
were a direct liability of the city, all those issued in 
excess of the restriction would be illegal, while 
otherwise they must be looked upon as special 
assessment bonds pure and simple, without redress 
from the city, and binding only upon the particular 
property benefited, in case of default. In spite of 
this case, it is still held by many able lawyers that 



270 BONDS AISTD STOCKS 

where there is nothing to the contrary expressed 
either in the act or the bond itself, the security 
may be considered a general municipal liability 
although primarily collectible by the county or city 
from special assessments. It is debatable however, 
whether or not that the holders of special assess- 
ment bonds should look wholly to the adjoining 
property for principal and interest. 

At any rate, until the final settlement of this 
question, a difference in market price at which this 
class of security rules, as compared with the reg- 
ular issue of the same city, will continue to exist. 
Thus we see Tacoma, Washington, floating its 
4-1/2% bonds at a premium, when issued for 
strictly municipal purposes, while its late sale of 
7 per cent special assessment bonds brought the city 
barely any premium; and Seattle easily floated a 
4-1/2 per cent bond for a regular municipal pur- 
pose at a time when its 7 per cent special assess- 
ment road bonds were seeking a market at par. 
The ease with which money can be borrowed by 
means of this "contingent liability," has led some 
young cities, ambitious of growth, to pave their 
streets out into the adjoining fields. It thus be- 
comes doubly important for the holder of special 
assessment bonds to know whether his claim is 
limited merely to the property abutting, or is bind- 
ing upon the whole city. 

A few years ago some eastern investors who had 
bought special assessment bonds — or improvement 
bonds, as they are sometimes called — issued by a 
city in Wisconsin had occasion to send a represent- 



MUNICIPAL SECURITIES 271 

ative to look over the ground. The holders did not 
know that the bonds were not a regular obligation 
of the whole city, the bond salesman having done a 
distinct wrong by not so telling them. The city is 
a wide awake growing city and its regular bonds 
should be absolutely safe ; but look out for its ^'im- 
provement" bonds ! To begin with, it was hard to 
find the streets called for on the bonds (improve- 
ment bonds generally state on the face of the bonds 
to what streets they refer) ; but after finding these 
streets, the next feat was to find the adjoining land 
given as security ! It was found to be an outlying 
section of the city laid out with wide streets, paved 
and finished as are those in the very busiest sec- 
tions of our largest cities. Of course, the city ofii- 
cials were probably honest in their belief that these 
improvements were needed and the city was short- 
ly to double or quadruple in population. ISTever- 
theless, the fact remains that some years after the 
bonds were issued and these improvements had 
been made, the grass was growing between the 
pavement blocks, and the birds were building nests 
on the sign boards and lamp posts. As to the 
property improved, it may be of value for a cran- 
berry bog ; but it certainly was not worth the cost 
of the improvements. 

Straight municipal bonds of established cities of 
over 20,000 population should be absolutely good. 
But, an underlying railroad or public utility bond 
is preferable to special assessment bonds or second 
grade municipals. 



272 BONDS AND STOCKS 

Special Assessment Bonds. 

Even our largest cities resort to these special 
assessment bonds. In Chicago, for instance, when 
a street is improved, the cost of improvement is 
often met bj an issue of special assessment bonds, 
the interest and principal of which is supposed to 
be paid by the owners of property abutting on the 
street which is being improved. These assessments 
rank after the assessments for general taxes which 
are used for the payment of the principal and in- 
terest of the regular Chicago bonds. In other 
words, a special assessment bond comes between a 
straight municipal bond and an ordinary mortgage 
which, of course, is subject to all taxes and assess- 
ments. 

Special assessment bonds usually recite on the 
face that they are issued for improvements on a 
certain portion of a given street, and that they are 
payable out of taxes levied upon that particular 
property. In Illinois, these bonds run for five 
years, drawing interest, the interest and one-fifth 
of the principal being payable each year. There 
is very little uncertainty about straight municipal 
bonds, most of the trouble coming from these spe- 
cial assessment or improvement bonds. In addi- 
tion to the legal difiiculties and the fact that the 
land frequently does not equal the amount of the 
bonds, there are other reasons why these bonds are 
often unattractive. For instance, when a street is 
improved in Chicago, an agreement is made with 
some contracting company, and sometimes before 



MUNICIPAL SECURITIES 273 

the work is completed over the entire district, the 
first instalment of the assessment falls due. In 
such cases, the tax-payer whose land has not been 
improved says to the treasurer of the city of 
Chicago, ''You have not improved my street, and I 
do not propose to pay my tax until the work is 
fully completed." Such cases are in addition to 
the instances where improvements have been made 
in outlying districts for work that was never 
needed, when the tax-payer goes to court and fights 
the bondholders. If the bonds have been legally 
issued, and if the bondholders have the courage to 
fight the case, they may win although in some cases 
it costs more than the bonds are worth. There are, 
however, many instances where the actual value of 
the property is not worth the improvement, as in 
cases where streets have been paved and sewers in- 
stalled throughout prairie districts where the value 
of the lots actually did not equal the assessment, so 
that if the bondholders took the lots, they would 
still lose money. 

Therefore, when purchasing municipal bonds, 
one should know whether they are ''straight muni- 
cipal bonds" or "special assessment bonds ;" and if 
the latter, they should be most carefully studied. 
If they are special assessment bonds issued by the 
city in which the reader lives and he can drive 
through the streets and see for himself that the 
property well deserves the improvement and is 
worth very much more than the cost of said im- 
provements, he is justified in buying these special 
assessment bonds, provided the legality has been 



274 BONDS AND STOCKS 

approved by leading attorneys. If, however, an 
investor is unable to see the property, he should 
make very careful inquiries before purchasing such 
bonds. 

How to Select Municipal Bonds. 

The number and variety of factors which deter- 
mine the value of municipal bonds make this 
perhaps the most difficult class of securities for the 
investor to appraise. In the case of corporation 
bonds, he can turn to the reports of the issuing 
company and study the earnings and the surplus 
over interest charges. A comparison of one com- 
pany with others in the same field enables one to 
form a judgment as to the worth of its bonds. It 
is however much harder to determine the standing 
of a "municipal." Of two cities of equal popula- 
tion and net debt, one may have a much better 
credit rating than the other; but even when he 
knows that the credit of a municipality is good, the 
investor cannot take it for granted that all its 
bonds are good investments. Each issue should be 
analyzed by itself to determine that it is legal. 
The laws of the states differ, for instance, in limit- 
ing the indebtedness which a city may incur. 
Usually, its indebtedness is based on property 
valuation. It is very common for a sinking fund 
to be provided for municipal bonds, and the in- 
vestor must decide if this sinking fund is sufficient. 
The character of the population is another factor 
in determining a city's credit. Is it largely made 
up of laboring people or of more prosperous classes ? 



MUNICIPAL SECURITIES 275 

If a resort with a transient population, this also 
must be considered. Lastly, the investor should 
find out how the borrowing of the municipality 
has been done. It may have borrowed heavily 
several times within a few years, or its borrowing 
may be spread over a number of years. All these 
are factors which affect the value of an issue. 

A short rule for selecting an issue is as follows : 
Endeavor to select such municipals as are legal for 
the savings banks of Isew York State, Massachu- 
setts, Connecticut or some other conservative state. 
Although the laws of Massachusetts are very satis- 
factory, yet the laws regulating the investments of 
Xew York savings banks are most often given as a 
guide. Such laws provide that banks can buy only 
the bonds of a city having at least 45,000 popula- 
tion and which have been incorporated at least 
twenty-five years. Moreover, the city must be 
located in a state admitted into the Union before 
1896. The total debt of the municipality must 
not be more than seven per cent of the entire valua- 
tion of the taxable property, and the city must not 
have been in default on principal or interest since 
1861. The following are a few of the more promi- 
nent cities of the country which this includes. Of 
course the first city of importance is IsTew York 
City (although it is interesting to note that Massa- 
chusetts savings banks are not allowed to invest in 
Xew York City bonds). Other cities in Xew York 
State are as follows : Buffalo, Troy, Syracuse, 
Albany, Binghamton, Elmira, and Jamestown, 
Cities outside of Xew York State whose bonds are 



276 BONDS AND STOCKS 

held in numbers are: Portland, Maine; Boston, 
Cambridge, Lowell, Worcester, and Springfield, 
Massachusetts ; Providence, Rhode Island ; Bridge- 
port, Hartford, and ]^ew Haven, Connecticut; 
I^ewark, 'New Jersey; Philadelphia, Pittsburg, 
Allegheny, Harrisburg, Reading, Scranton, Penn- 
sylvania; Baltimore, Cincinnati, Dayton, Louis- 
ville, Indianapolis, Detroit, Grand Rapids, Mil- 
waukee, Minneapolis, St. Paul, Des Moines, 
Omaha, San Francisco, Los Angeles, St. Louis, 
and Kansas City. 

In addition to the above list one may be safe in 
purchasing the bonds of any ^STew England city, or 
of any town in Massachusetts, Connecticut, New 
York or Pennsylvania. 



CHAPTER XVI. 

EXCHANGING INVESTMENTS. 

A Trick Played Upon Inexperienced 
Investors. 

IT may be all right to swap marbles or jack- 
knives, and there may be nothing dangerous in 
trading horses; but when it. comes to bonds, 
stocks and other securities, upon the income of 
which one's family is absolutely dependent, this is 
another matter. 

In talks to bond salesmen through the Babson 
Courses on Investments they are advised to ask an 
investor, when he says he has ^'no money," if he has 
any securities which he would trade. In fact, one 
of the principal uses of a ^'Composite Circular of 
Bond Offerings"'^ is to enable dealers to dispose of 
any bonds w^hich they take in trade. Or, to state it 
another way, it enables dealers to take in trade any 
one of the fifteen thousand different bond issues 
held by investors and to find some kind of a market 
for anything in the line of a bond or stock certifi- 
cate which might ever be offered to them. This 
advice, however, should not he abused, or used to 
^'saddle'' investors with poorer securities than they 
originally held. 

The process which has been recommended to 
bond salesmen is that if, when out on the road, they 
encounter a man who has no money to invest, but 
who is interested in the bonds which they are offer- 
ing, that they ask this man if he has not some in- 

*Issued by the National Quotation Bureau of 6G Liberty St., 
New York City. 



278 BONDS AND STOCKS 

active bonds with which he is not fully satisfied, 
and which he would like to exchange for higher 
grade bonds which are well known and the security 
of which is beyond question. This is the method 
that bond salesmen may use when business is dull 
and money is scarce, whereby they can both per- 
form a distinct service to their clients, and at the 
same time turn in an honest penny for their firm. 
In fact, many of the high grade firms do a large 
amount of this work, making two commissions, to 
both of which they are well entitled. 

Justifiable Swapping. 

Only a short time ago a letter was received from 
a well-known firm, stating that from a list of pub- 
lished stockholders, they (the firm) saw that a cer- 
tain investor was the holder of twenty-five shares 
of stock in a certain industrial company. This 
letter stated that, owing to the present depression 
in business the firm fully believed that said stock 
would decline in price and its dividends would pos- 
sibly be reduced. They recommended that the in- 
vestor sell the common stock of this well-known 
industrial company, which had already had a phe- 
nomenal rise, and re-invest the money in the Penn- 
sylvania Railroad Company Convertible 3-1/2% 
bonds due October, 1915, selling at about 96 and 
interest to yield about 4-1/2%. The latter argued 
that although the Pennsylvania bonds do not yield 
quite so much as the stock in question, yet said 
bonds are absolutely safe ; while the common stock 
of this great industrial company, although it may 



EXCIIAXGIXG INVESTMENTS 279 

some day be very valuable, will probably decline in 
price in the meantime, and considering the secur- 
ity, permanent yield, and immediate opportunity 
of appreciation, it should be much better for the 
investor to make the exchange. 

Such an argument is wholly justifiable, and the 
firm that writes such a letter is performing a dis- 
tinct service to the community. Fortunate is this 
country for having such firms, and fortunate are 
the investors who deal with them and receive their 
communications from time to time. Of course, 
these firms often suggest that on such trades a little 
money be paid by the investor in order to secure an 
equal amount of better bonds; but this also is 
justifiable. Bonds are the same as clothes, fur- 
niture, or any other commodity. Although you do 
not always receive what you pay for, you never 
receive more than you pay for; and in order to 
exchange one bond for another, ivhlcli either yields, 
the same and is more secure^ or yields more and 
has tJie same security, the purchaser must pay 
something "to boot," provided the maturity and 
marketability of the bonds are the same. 

Of course, all men do not agree to this argument, 
and a very able man was advised recently in mak- 
ing a trade to pay something to boot ; he replied by 
telling a story of his father who continually traded 
horses, paying a little to boot each time, only to end 
with neither horses nor money. Said he, ^'I am 
willing to trade, but I will never pay anything to 
boot. I must either trade 'even' or else the other 
party must pay me something to boot." 



280 BONDS AND STOCKS 

However, his father's case may have been one 
where, in order to obtain better horses by continual- 
ly paying something to boot, he reached a point 
where he had neither money nor horse ; but this is 
a great exception. Most people reach a point v/here 
they have neither money nor horse by continually 
trading a good article for an inferior article for the 
sake of getting something to boot. 

Good Bonds for Bad. 

One of the best illustrations of such a case is that 
of a young lawyer who was left, by his father, con- 
siderable property which was very largely personal, 
consisting of the highest grade bends such as mu- 
nicipal bonds of leading cities like 'New York, 
Philadelphia and Boston, yielding about four per 
cent, and mortgage bonds of large railroad systems 
like the Pennsylvania, the New York Central, the 
Illinois Central, the Chicago, Milwaukee & St. 
Paul and others, yielding nearly four and one-half 
per cent. Like such other young men, he had never 
been obliged to earn any money; but his expenses 
continually increased, and he soon reached a point 
where he wanted a greater income. Instead of 
making a definite study of investments and chang- 
ing his investments in accordance with conditions, 
confining them always to the highest grade secur- 
ities (either bonds or short term notes), he began to 
trade his four per cent bonds for bonds that yielded 
four and one-half per cent. These he traded for 
bonds that yielded five per cent; while these he 
again traded for bonds that yielded -Rve and one- 



EXCHANGING INVESTMENTS 281 

half per cent; and these he once more traded for 
bonds that yielded him six per cent. Each time he 
got poorer security and unconsciously paid a large 
commission to the bond house for making the ex- 
change. The result is that today this young man 
has none of his good securities, and a large propor- 
tion of those which he owns are in default. There- 
fore, not only has he greatly deteriorated the secur- 
ity behind his father's investments and uncon- 
sciously reduced their market price nearly forty 
per cent, but, owning to the defaulted bonds, he 
actually receives a smaller yield today than he did 
when this money was invested in only the highest 
grade securities yielding about four per cent. 

Many innocent investors, who are not trained in 
business, are urged to trade good securities which 
they have owned for years for speculative or uncer- 
tain stocks and bonds w^hich salesmen tell them are 
^'fully as good if not better." 

A short time ago a bond salesman related the 
following story which had just come to his atten- 
tion. Said he, ''On my last trip to Maine I called 
upon one of my customers, and she asked me about 
some district irrigation bonds which have been 
issued on a certain property in Colorado. They 
are bonds which were offered at par to yield six per 
cent. Of course, I told her frankly that they are 
nothing that she would be interested in, knowing 
that she desires to confine her investments exclu- 
" sively to municipal bonds and prefers not to buy 
even high grade corporation bonds. 'But,' said 
she, 'I have already bought Rve one thousand dollar 



282 BONDS AND STOCKS 

bonds. You remember certain bonds (she gave the 
name) which I purchased of you a while ago at par 
and interest. Well, this house offered to purchase 
these from me at 107 and interest. Believing that 
these new bonds are a good Colorado municipal 
bond and yield about two per cent more, of course 
I was interested. I told the bond salesman, how- 
ever, that I should like to wait and look the matter 
up ; but he stated that he could not give me time to 
do this because he had only a few of the bonds and 
there were two people in town who would take them 
if I did not do so. As the house advertises in the 
leading magazines and religious papers, I thought 
that it must be absolutely honorable, and therefore, 
made the trade.' Of course I explained to her that 
it is almost impossible to obtain a straight muni- 
cipal bond to yield six per cent and that these 
bonds are not municipal bonds, although one might 
think so from reading the circulars. In short, 
although they are secured by a lien on a certain 
portion of land supplied by an irrigation sys- 
tem, and the interest may be collected by a certain 
tax on this land, yet practically her bonds resembled 
only a real estate mortgage subject to the regular 
municipal taxes on the property. I explained that 
she had purchased only an irrigation district bond 
and not a municipal bond as she thought, although 
there was no way by which she could hold the bond 
house or the bond salesman legally liable, as the 
circular offering the bonds stated nothing untrue. 
I therefore told her that the only thing for her to 
do was to sell these irrigation bonds as soon as pos- 
sible, take her loss and forget the episode. 



EXCHANGIXG INVESTMENTS 283 

"Slie, therefore, told me to go ahead, and I im- 
mediately endeavored to sell these irrigation bonds. 
One can imagine my chagrin when I found that, 
within two weeks from the time she purchased them 
at par, the best I could sell them for was $600 
each. Upon bringing the matter before the bond 
house, they told me that they w^ould be obliged to 
lose ten per cent on the municipal bonds which they 
had purchased of the woman; that they had paid 
the salesman five per cent, and the advertising ex- 
penses amounted to ten per cent ; so that instead of 
receiving par for their irrigation bonds, they really 
received only 75 net to them. Moreover, they had 
paid 65 for the irrigation bonds, leaving a net 
profit to them of only ten per cent. Therefore, 
they truly could not afford to take back the irriga- 
tion bonds for more than 60, even although it w^as 
only two weeks after the sale." 

What can be done relative to such matters ? The 
bond house did not make an abnormally large 
profit, and the case was not misrepresented to the 
woman, but it was absolutely wrong from start to 
finish. First, the irrigation company should not 
have been formed ; second, a bond house should not 
purchase any bonds which sell for only 65 ; third, 
the bond salesman should have told the woman that 
she was not -buying a municipal bond, instead of 
being content to let her assume anything, and 
finally the luoman should have had sense enough 
to hnow that she could not exchange a four per 
cent bond for a six per cent bond and get some 
money to boot j without giving up a good part of 



284 BONDS AND STOCKS 

lier security. But this is not all of the story. The 
bond man states further that since then $5,000 of 
municipal bonds, such as were purchased of this 
woman have recently been purchased by this firm 
of a broker at about ninety-seven ; and upon look- 
ing up the bonds' numbers, he found them to be 
the same municipal bonds which he had sold the 
woman some time previous and which she had 
traded for the irrigation bonds. 

This is only one illustration of a host that might 
be given. The bonds referred to as being pur- 
chased by a civil engineer at par, secured by a first 
mortgage on an Ohio property, and which are now 
practically worthless, were really not purchased by 
the civil engineer for cash but were taken in trade 
for five good bonds which he had held for some 
years. These were ^yq telephone bonds, which he 
had purchased at par and which yielded ^yq per 
cent ; but a bond salesman came around and offered 
him 105 and interest for these telephone bonds if 
he would buy the Ohio bonds at par. In other 
words, to get on his old bonds a bonus of only $250, 
this man lost $5,000. 

When a man has his cash and malces his first 
investment^ he usually shows care and forethought, 
hut about once m so often, he seems to have an 
uncontrollable desire to trade. Ninety -nine times 
out of one hundred he gets 'Hhe small end of the 
sticTcj" Therefore, be content with trying to beat 
a man at your own game, but do not try to beat a 
bond salesman at his. 



EXCHMTGTNG INVESTMENTS 285 

Excliangmg Stocks. 

The above is not the only way an investor gets 
into trouble by exchanging securities. A certain 
promoter in Boston, sold stocks in a large number 
of companies and received as his profit a goodly 
proportion of the stock. Only one of these com- 
panies amounted to anything; but certain circum- 
stances developed wherein he saw clearly that the 
stock of one of these companies would some day be 
very valuable ; in fact he was offered a large sum 
of money by certain interests if he could get back a 
majority of this one stock. In order to do this, he 
first arranged to have the company stop paying 
dividends. This any corporation can readily do, 
as it is always advisable to have a good surplus, and 
the profits can be used for extensions, which are 
always necessary, instead of borrowing money for 
such extensions. 'No one can justly complain if a 
corporation desires to be ultra conservative and use 
its profits for extending its plant rather than bor- 
rowing money therefor. As dividends w^ere sus- 
pended, the demand for the stock lessened and the 
price declined. The stock was so distributed among 
small investors, however, that none of them had 
enough interest to cause any worry, and but few 
took the trouble of selling. In fact, when he sent an 
agent to ask them to sell, they immediately became 
suspicious and wondered why he should wish to 
buy if the stock was of so little value as the agent 
claimed. 

This promoter, therefore, conceived a scheme 



286 BONDS AND STOCKS 

whereby he inaugurated an ^^underwriting com- 
pany" and offered the holders of all of the different 
stocks which he had previously sold an opportunity 
of returning them to him and taking in exchange 
the stock of the new holding company. His argu- 
ment was very plausible, stating as he did that 
probably a number of the stocks were valuable and 
a number were not; but which were valuable and 
which were not, it was impossible to tell. There- 
fore, he argued, that if these holders would place 
all their stocks together in the treasury of this 
holding company and take new stock in the holding 
company in exchange therefor, they would proba- 
bly make a handsome profit and at least everyone 
would receive the same treatment. He also ex- 
plained how the holding company had the privilege 
of exchanging stocks and of purchasing additional 
stock if they so desired from time to time, which he 
said would still further enhance the value of the 
holding company's stock. As, under this scheme, 
he offered to take back all of the stock which he had 
previously sold instead of the stock of only one 
company, the suspicions of the holders of the stock 
of this one company were not aroused, and they 
innocently turned in all their holdings. 

A reasonable time after these holdings had been 
turned in and the entire deal consummated, this 
promoter who incidentally controlled the holding 
company, had the holding company part with these 
valuable shares to a firm in which he held a large 
interest; and they in turn exchanged them for 
shares for which a large sum of money was later 



EXCHAN-GING INVESTMENTS 287 

received, hut ivhicli money never reached the treas- 
ury of the wide?' writing company. Of course, if 
any of the stockholders of the underwriting com- 
pany had been willing to spend a large sum of 
money fighting the case, they doubtless could have 
obtained some of the money received from these 
valuable shares, although the promoter worked 
under the advice of able legal talent. The shares, 
however, were so scattered among small investors, 
each of whom had only a few hundred dollars in- 
vested therein, that the matter was dropped. A 
few original holders in the one valuable company, 
however, who for some reason or other did not ex- 
change, now have an investment which they can 
sell at a large profit, while those who exchanged for 
the holding company stock have practically nothing. 

Defaulted Bonds. 

There is a firm of so-called ^^investment dealers" 
which makes a practice of obtainng the lists of 
holders of defaulted bond issues, and going to these 
people who are already frightened, urging them to 
exchange their defaulted bonds for worthless oil or 
mining stock. For instance, one firm obtained a 
list of the holders of the bonds oi a well-known 
railroad company, which were in default a short 
time ago, the price of which fell to about 40. As 
these bonds were well secured, it was commonly 
acknowledged among all students of the situation 
that, ninety-nine chances out of one hundred, in- 
terest would soon be paid again and they would sell 
much higher. In fact, these bonds now sell in the 



288 BONDS AND STOCKS 

vicinity of 80. This firm, however, sent an agent 
to the various holders, filling them full of ^^gloom" 
and offering in exchange for each one thousand 
dollar bond, ten shares of stock in a mining com- 
pany, which, although like the bonds, was not then 
paying interest, would, they said "yevj shortly pay 
a good dividend and should sell considerably above 
par." Of course, this is a very plausible argument 
and it can readily be seen why many of the holders 
of these bonds exchanged them for the stock on the 
belief that ^^a coming property is better than a dead 
one." However, instead of these holders recu- 
perating their money by making the exchange, they 
have practically lost their all; while, if they had 
held the bonds, they would now be able to obtain as 
much, if not more, than they originally paid for 
them besides having received interest at six per 
cent during the defaulted period. 

As a general rule the investor should feel free to 
go to the officers of the banks in which he does busi- 
ness, and frankly ask their advice. If these offi- 
cers advise making the exchange, it is probably best 
to do so. Of course, there are instances where the 
bank officials will not feel willing to take the re- 
sponsibility. In such cases it is well to sell the 
securities and re-invest in other strictly high grade 
securities which the bank recommends and in which 
they have their own money invested. 

Although many other illustrations might be 
given, the following are submitted as two character- 
istic letters recently received and answers thereto. 



EXCHAXGIXG INVESTMENTS 289 

Babson Statistical Organization, 

TTelleslev Hills, Mass. 
Dear Sirs : — 

I have had a certain broker call on me several 

times, urging me to sell the Eailroad 

Company First Refunding 4's due April, 1951, 
which I hold, but which are now in default and 
which sell at about 40 flat. Do you advise selling 
them or exchanging them for some other good rail- 
road bonds which he offers ? 

He also offers me some very good bonds, with 
which I am well acquainted, for my .......... 

Railroad Company 3-1/2 's. Have you any advice 
relative to this exchange ? 

Very trulv vours, 



Reply. 
Dear Sir: — ■ 

In reply to your letter will state that I think it 

would be a great mistake for you to sell the 

Railroad Company Refunding 4's at present prices. 
Although they may sell lower before the reorgan- 
ization is completed, yet I believe that they, or the 
securities which you will receive in place of them, 
are bound to sell much higher. 

Regarding the three and one-half per cent bonds 

of the Railroad Company to which 

you refer, you may be interested to know that there 

is a bill before the Legislature to make 

these bonds a Iciral investment for savings banks of 
said state, and if this bill is passed, said bonds 



290 BONDS AND STOCKS 

should sell at very mucli higher prices. Possibly 
the bond salesman has this bill in mind. 
Very truly yours, 

Roger W. Babson^ 

President. 
Babson's Statistical Organization, 

Wellesley Hills, Mass. 
Gentlemen : — 

I take the liberty of asking your advice in regard 
to a proposed exchange of bonds belonging to an 
estate of which I am trustee. 
. Referring to earlier statement, I informed you 

that the estate holds 4% bonds of the 

Railroad Company. We are asked to exchange 

these at the present time for Telephone 

Company Collateral Trust 4% bonds, through the 
house of , who claim that these tele- 
phone bonds are legal for Massachusetts Savings 
Banks, and exchange can be made with about 6% 
margin in our favor. 

Where such a margin is offered I understand 
there must be a reason for it; but am unable to 
find any unfavorable expression in regard to the 
Telephone Company. Kindly let me know if you 
recommend this exchange, which as you will notice 
carries the same rate of interest in both cases. 
Thanking you for an early reply, I remain, 



Reply. 
Dear Sir: — 

Your favor of the lYth received, and will state 
that the Telephone Collateral Trust 



EXCHANGING INVESTMENTS 291 

4's should be absolutely good, and jou are fully 
justified in making the change although, owing to 
the different maturities, there is not so much dif- 
ference in the ultimate yield of the two bonds as 
you would naturally think. 

Another reason why the telephone bonds sell for 
less money is because there are many more of them 

on the market than there are of the 

Railroad bonds; moreover additional telephone 
bonds will probably be issued within a short time. 

The bond house which you mention, however, is 
absolutely honorable and if the Boston office advises 
this by letter, you had better follow their advice. 
Very truly yours, 

EOGER W. BaBSOX^ 

President. 
Advice from Banks. 

Of course, from this, one must not think that 
many bond dealers or brokerage houses resort to 
unscrupulous practices. There is probably no class 
of business which is operated by men with a higher 
standard of integrity than the bond business. E'ot 
only are these interested in the sale of investment 
securities, but they are doing splendid work in aid- 
ing the average man to systematically save and 
provide for his later years. It would be hard to 
give the best rule to follow in distinguishing be- 
tween honest and dishonest firms, excepting perhaps 
the one to inquire of the local bank. 

Therefore, when approached to make an exchange 
of securities by a house or individual of whose 



292 BONDS AND STOCKS 

integrity an investor is not absolutely certain, it is 
well to make inquiries of the local banks. If the 
bank advises the exchange it is usually well to fol- 
low their advice ; otherwise it is best either not to 
make the exchange or else to tell the firm or indi- 
vidual that no change is desired, but cash will be 
considered. After getting the cash offer, the in- 
vestor can then have the local bank obtain bids 
from two or three other sources and sell to the high- 
est bidder. After receiving this cash, he can wait 
until fundamental business conditions indicate that 
prices are at their lowest point and then conserva- 
tively invest it as he would his original savings 
in well-known, high-grade, seasoned securities. 



CHAPTER XVII. 

DEFAULTED BONDS. 

A]S[ investor sliould not expect more than 
4-1/2% on an investment, unless he renders 
some distinct service other than simply 
loaning the money. The simplest way for the in- 
vestor to attempt to obtain more than this normal 
rate of interest is by assuming some risk, and there- 
fore, the greater the risk the greater the reward for 
the lucky ones. For this reason, 6% bonds and 
7% preferred stocks are offered to investors at 
about par. In such cases, the investor is receiving 
about 4-1/2% for the legitimate use of his money, 
the same as he would receive on an investment 
which is absolutely safe, and is given in addition 
the balance of from 1-1/2% to 2-1/2% for the risk 
he is taking in buying unseasoned or unmarketable 
securities. Able bankers, however, do not believe 
in the investor attempting to obtain a high rate of 
interest by assuming any amount of risk, and they 
claim it is a great mistake for the investor to at- 
tempt to obtain a high rate of interest by buying 
such unseasoned bonds and preferred stocks. 

The real legitimate method of obtaining more 
than 4-1/2% v>'ith safety is by making a systematic 
study of investments and purchasing only during 
panics and other periods of business distress when 
money is in great demand and securities are being 
sold at a discount. A man who buys during a 
panic performs a distinct service, and should re- 



294 BONDS AND STOCKS 

ceive a profit for said service in addition to a nor- 
mal rate of interest. In other words, the investor 
should either be satisfied with about 4-1/2%, or 
else he should study fundamental conditions and 
confine his investing only to times of panic, which 
occur only about once in two or three years. 

How Service Can Otherwise be Eendered. 

There is, however, one additional method by 
which an investor may be morally entitled to a 
higher rate of interest, and this is in connection 
with the purchase of defaulted bonds. As the 
readers know, about 3% of the corporation bond 
issues which are offered to the public, default ; that 
is, the corporations issuing them are unable to pay 
the interest thereon at some period. Sometimes 
this default occurs within a year or two from the 
time they are issued, and in other instances not for 
several years. Usually, the default comes within 
the first -^Ye years, and it is owing to this that 
bonds are referred to as ^^seasoned" bonds, meaning 
bonds which have been issued and the interest 
regularly paid thereon for over five years. Of 
course, when there is a default in the interest on 
the bonds, the stock, theoretically, i^ of no value, 
and legally, the stockholders should lose everything 
before there is a default in the bond interest. Un- 
fortunately, owing to the fact that so many lawyers 
devote their energies to the miscarriage of justice 
rather than to the execution of justice, this usually 
is not the case. ISTevertheless, for an illustration 
in this chapter, it may be assumed that when bonds 



DEFAULTED BONDS 295 

have defaulted, the stockholders have become tired 
of paying additional money and have relinquished 
control of the property, deciding either to take a 
total loss or else be satisfied with what the bond- 
holders decide to do, after the bondholders have 
satisfied their o^^tl claims. Simultaneously with 
the stockholders relinquishing their claim in the 
corporation, the bondholders assume control ; when 
bonds are in default, it may logically be assumed 
that the bondholders are controlling the property. 

Trust Company Receipts. 

If all the bonds of a corporation in default 
should be o^vned by one man, it would be necessary 
simply for this one man to assume control of the 
corporation, the same as the mortgagee takes posses- 
sion of a house ilpon which he holds a mortgage, 
when the interest is in default. In practice, how- 
ever, a bond issue of a given corporation is scat- 
tered among hundreds and perhaps thousands of 
individuals located in different parts of the world. 
Thus, it is necessary for some of the larger holders 
to unite and form a committee of about five persons 
who stand well in the community and are known to 
be men of ability and integrity. Sucli a committee 
usually works in harmony with the trust company 
which is trustee for the mortgage, for when bonds 
are originally issued, it is necessary for a trust 
company acting as a third party to stand between 
the corporation and these hundreds of different 
bondholders. Therefore, in the case of nearly all 
defaulted bonds, the bondholders' interests are rep- 



296 BONDS AND STOCKS 

resented hj sl committee composed of the largest 
bondholders or else their representatives. 

In order that their action may be as unanimous 
as possible, this committee asks for a deposit of all 
the bonds of the issue, and the small investors with 
only one bond are therefore urged to deposit with 
the committee in order that the committee may 
represent all the bonds of the issue. Such a com- 
mittee usually assumes no liability, but accepts the 
deposit of these bonds under a ''trust agreement" 
or "deposit agreement" as it is usually called, 
which shows just what rights the bondholders still 
hold, what the committee is to attempt to do, and 
what position the trust company assumes in the 
matter. ''Trust Company" is here mentioned, be- 
cause the committee as individuals will not assume 
the responsibility of holding all of these bonds, but 
insists that some trust company shall be the depos- 
itory. Usually, the same trust company is selected 
as depository as is the trustee for the company, but 
this is not a necessity. 

It will therefore be seen that the four parties to 
a defaulted bond issue are: first, the corporation 
which for practical purposes need not be con- 
sidered; secondly, the bondholder who has money 
invested ; third, the bondholders' committee which 
is protecting the bondholders, and fourth, the trust 
company which holds the bonds or which stands 
between the bondholders and the bondholders' com- 
mittee. (Of course, if this trust company is a 
different one from the trust company which is 
trustee for the mortgage, there are five parties, for 



DEFAULTED BONDS 297 

in sucli a case there would be two trust companies 
interested in the reorganization. ) 

Of course, when the bondholder deposits his 
bonds with the trust company for the benefit of the 
committee, such a bondholder wishes some receipt, 
and therefore the trust company, on behalf of the 
committee, issues a receipt, and the following gives 
a typical example : 

CERTIFICATE OF DEPOSIT 
No. $ 
of 



Face Value 
of Bonds. 

RAILROAD COMPANY 

First Mortgage Refunding 4% Gold Bonds 

issued under the Mortgage dated April 1, 1901, to the 

Trust Company of the City of New York as Trustee, with 
coupon due July 1, 1910, and all subsequent coupons thereto 
attached, deposited under an Agreement dated May 4, 1910, 
between depositors of the above mentioned Bonds and 

, , , , and , the 

Committee named in said Agreement 

The Trust Company of 

New York, as Depository, 

hereby certified that it has received from First 

Mortgage Refunding 4% Gold Bonds of Railroad 

Company at the par value of 

dollars 

with coupons thereto attached as above stated; said Bonds 
have been deposited subject to the terms and conditions of 
the above mentioned Agreement dated May 4, 1910. The 
holder thereof by receiving this certificate consents to and 
is bound by the provisions of said Agreement, and is entitled 
to receive all of the securities, benefits and advantages to 
which the depositor is or may become entitled pursuant to 
the conditions of said Agreement; or the said Bonds so 
deposited together with the coupons thereto attached may 
be returned to or withdrawn by the holder thereof in accord- 
ance with the terms and provisions of said Agreement upon 
presentation and surrender of this certificate duly endorsed. 



298 BONDS AND STOCKS 

This certificate is transferable only on the books kept for 

the purpose at the office of the Trust Company of 

New York, upon surrender of this certificate duly endorsed 
and thereupon a new certificate will be issued to the trans- 
feree in exchange therefor. 

THE TRUST COMPANY OF NEW YORK, 

Depository, 

New York, by 

Vice Pres. 



Sec'y. 

This receipt is especially mentioned because, 
when purchasing a defaulted bond, the investor 
really does not purchase a bond but rather one of 
these receipts. Therefore, theoretically the receipts 
for defaulted bonds are being considered in this 
chapter rather than defaulted bonds proper. 

Why These Eeceipts Usually Sell 
Below Their Value. 

As above suggested it is often the case that an 
investor may render a service by purchasing these 
receipts. This will entitle the investor to a profit 
in addition to the interest on his money and, if this 
is the case, there must be some reason therefor. 
Briefly, the reason why this is possible is because 
the ordinary individual does not like to hold these 
receipts, and consequently disposes of them for less 
than their intrinsic value. There are various rea- 
sons why the average investor prefers to take a loss 
on defaulted securities rather than to hold the 
receipts, and among these reasons are the follow- 
ing: 

(1) Such receipts do not carry interest in the 



DEFAULTED BONDS 299 

ordinary sense of the word. Until a bond defaults 
it is sold ^'with interest." That is to say, if you 
purchase on April 1st, a $1,000 4% bond, with in- 
terest payable January and July 1, at 101, you will 
pay $1,010 for the face of the bond and in addition 
three months accrued interest at 4%, w^hich will be 
$10 making $1,020 in all. If, however, this bond 
should default, it would no longer be sold ''and 
interest." Thus so long as one holds such a de- 
faulted bond, or the receipt issued therefor, he 
apparently is losing interest. In other w^ords, 
assume that the above mentioned 4% bond should 
default and the price drop to 80 and continue at 
this figure. After this happened, if one should 
desire to sell the bond or purchr.se more, it would 
make no difference what month he purchased it or 
sold it, there would be no accrued interest to pay, 
the total amount being simply $300 ''flat." 

As the money is worth at least 4%, it is apparent 
that the holder of a $1,000 defaulted bond is losing 
at least $40 or 4% every year that he holds it. 
Whether or not this is true, it is apparent that if 
the price of these certificates is to remain fixed at 
said 80 for two or three years, while the property 
is being reorganized, it certainly would be advis- 
able for the holder to sell his certificate immediate- 
ly after default and then buy them in again shortly 
before the reorganization plans are announced. He 
then could have his money on deposit in some bank 
in the meantime and draw his 4% interest, thus 
saving 4% a year. Of course, as will be shown 
later, it does not always work out this way ; but in 



300 BOKDS AND STOCKS 

many instances it does, and in all instances the 
holder of a receipt is obliged to forego receiving 
the interest each six months, which may be a hard- 
ship for many and makes these receipts impopular. 
(2) Another reason why the average investor 
does not like to hold receipts for defaulted bonds is 
the fact that in many reorganizations an assess- 
ment is called for. This usually is because when 
the bondholders are obliged to take over the opera- 
tion of a corporation, they find the treasury devoid 
of working capital. As working capital is abso- 
lutely necessary, the bondholders through receivers 
who represent them, apply to the court for permis- 
sion to issue receiver's certificates, in order to raise 
money for necessary working capital, repairs, etc. 
Although receivers' certificates are classed among 
the very best of investments, combining as they 
usually do absolute security, a short time maturity 
and a fair rate of interest, yet they are dreaded by 
bondholders. The reason for this is because re- 
ceivers' certificates take precedence to bond issues 
and must be paid before the bondholders receive 
anything for themselves. 'Now, in order to pay 
these certificates, the money can usually be raised 
only through an assessment. Of course, these) 
assessments are usually levied on the stockholders 
if possible, the bondholders saying to the stock- 
holders: ''If you will pay these certificates and 
furnish additional money to put the company on a 
sound financial basis, we will continue to hold our 
bonds and will return to you the control of the com- 
pany." In such a case, although the old stock is 



DEFAULTED BONDS 301 

entirely wiped out, yet new stock is given to the 
stockholders who will bear their proportion of the 
assessment. 

Unfortunately, there are many instances when 
the stockholders will not pay this assessment and 
prefer to take a total loss than to bother with the 
corporation any further. In such a case the bond- 
holders are obliged to assess themselves. This is 
usually done by wiping out the old bond issue and 
giving new bonds to such bondholders as will help 
on the assessment. A small proportion of bonds, 
preferred stock, or some other security is given to 
such bondholders who will not help on the assess- 
ment. Consequently, the investors purchasing 
receipts for defaulted bonds must always be pre- 
pared to pay an assessment if the same is necessary. 
Certainly, unless one is willing to pay an assess- 
ment and obtain all the advantages of the reorgan- 
ization, he is surely apt to make a loss. E'obody 
likes to pay an assessment. Consequently, this 
fear is another reason why defaulted bonds are 
unpopular and usually sell below their intrinsic 
value. 

(3) These receipts are usually not payable to 
bearer and must be forwarded to the trust company 
for transfer whenever they are bought or sold. In 
the instance of certain receipts listed on the ISTew 
York Stock Exchange, this is not the case as such 
receipts are often payable to bearer ; but very few 
are listed on any exchange. Although this is 
really no objection and is no more of an inconven- 
ience than the transferring of stock, yet for some 



302 BONDS AND STOCKS 

reason or other people do not like to hold these 
receipts which are not payable to bearer. Possibly 
they do not care to have it known that they are 
holders of defaulted bonds; but whatever the rea- 
son, there is a prejudice among investors against 
these receipts. They are also rather unsatisfactory 
collateral. Owing to the possibility of assessment 
and the non-payment of interest, banks prefer not 
to loan upon them. This tends to prevent specula- 
tion in the receipts and greatly limits their market. 
Unfortunately, speculation tends to increase prices 
rather than to lower them. Consequently, a secur- 
ity which is not put up for speculative purposes 
often sells for less than its intrinsic value. 

Of course, there are also other reasons why these 
receipts are not popular, some of these reasons 
being real, although psychological. For instance, 
very few securities are considered at the fair aver- 
age intrinsic value. It is human nature either to 
be hopeful or to be fearful. Consequently, most 
securities are purchased with the hope of increased 
prosperity, or else are sold for fear of disaster. We 
are loath to calmly consider a proposition on its 
merits, and either we are enthusiastic on its merits, 
or pessimistic. As long as a bond pays interest 
regularly, we all tend to talk enthusiastically and 
think well of it ; but as soon as it defaults, we all 
tend to become pessimistic and think evil of it. 

(4) There is also another reason why this is so, 
namely; that it is much more difficult to obtain 
information relative to companies in hands of re- 
ceivers than is the case with going concerns. The 



DEFAULTED BONDS 303 

bondholders' committees usually operate on the 
"star chamber" principle and are very loath to give 
the bondholders information which is their due. 
This is absolutely wrong, for certainly the members 
of a bondholders' committee are purely the servants 
of the holders of bonds deposited therewith, and it 
seems absolutely wrong that the committee mem- 
bers should be so secretive. Of course, there may 
be instances where for special reasons their work 
must be strictly confidential ; but in the majority 
of instances, an entirely different reason is often 
at the bottom of this secretiveness. This reason 
may often be attributed to the fact that the mem- 
bers of the bondholders' committee and their spe- 
cial friends wish to take advantage, for personal 
profit, of their inside information. There is no 
doubt that there have been many instances where 
the bondholders' committee have gone about with 
long faces and pessimistic talk, depressing the price 
of the bonds in order that they might pick them up 
at low prices for their personal profit. On the 
other hand, there are instances when they have 
found that it was impossible to work out a satis- 
factory and profitable reorganization, where these 
committees have given out rosy interviews and have 
quietly disposed of their own bonds before announc- 
ing their decision. Therefore, these acts of bond- 
holders' committees and especially their secretive- 
ness have been potent factors in causing defaulted 
securities to sell below their intrinsic value. 



304 BONDS AND STOCKS 

The Advantages of Defaulted Bonds. 

N'evertheless, the saying that every cloud has a 
silver lining applies to defaulted bonds and the 
receipts issued therefor. That is, the very fact that 
the various disadvantages above mentioned cause 
the bonds to sell below their intrinsic value often 
make such bonds and their receipts attractive to 
investors who have courage and individuality. 
Some of these advantages may be briefly summar- 
ized as follows : — 

(1) Take the question of interest for instance. 
Although no interest is regularly paid upon such 
receipts, yet if the property is good for anything 
more than the face value of the bonds, the bond- 
holders can collect this interest at the time of the 
reorganization. For instance: there is an issue 
upon which no interest has been paid for four 
years; but it is an underlying lien to two junior 
issues, and when the reorganization is finally com- 
pleted, either the stockholders or the holders of 
these junior issues will be compelled to raise the 
money to pay the face value, of these first mortgage 
bonds in full, plus interest. Therefore, if one has 
a well-secured first mortgage bond, he is ultimately 
sure of his interest, although he may be obliged to 
wait two or three years. On the other hand, in 
order that this statement may not be misunder- 
stood, it may be said that this can be counted upon 
with certainty only in the case of well-secured 
underlying issues. 

(2) As stated above, one of the objections to 



DEFAULTED BONDS 305 

these receipts is that the holders thereof are liable 
to assessment. The fact that these assessments are 
so "unpopular makes it necessary to give an exceed- 
ingly liberal inducement to holders in order that 
the assessment may be paid. The result of this is 
that these investors who have the courage to pay 
the assessment are handsomely rewarded therefor. 
The shrewdest investors are continually seeking 
opportunities for the payment of assessments, 
knowing that in no other way is it possible to 
obtain so much for one's money. Moreover, in the 
case of underlying bonds and other bonds well 
secured, it is usually unnecessary even to pay this 
assessment. If the committee representing the 
underlying bonds insist on its rights, it usually 
forces the holders of the junior bonds to pay an 
assessment ; while if the holders of the junior bonds 
have sufficient "sand" and are not also stockholders, 
they can usually force the stockholders to pay this 
assessment. Therefore, in the minds of the ablest 
investors, the assessment feature is no disadvantage 
whatsoever. 

(3) As stated above, these receipts are un- 
popular because they do not bear interest, because 
they must be returned to the trust company to be 
transferred, and because for other reasons, they are 
so unlike regular bonds upon which interest is 
being regularly paid. In this connection one ques- 
tion may be asked, namely: Even at its icorst, why 
is the receipt for a defaulted bond any ivorse than 
a certificate for a non-dividend paying stocJc — 
either preferred or common? Unwise investors 



306 BONDS AND STOCKS 

often sell receipts for defaulted bonds because of 
prejudice and then invest the same money in non- 
dividend paying stocks. There is no advantage 
which a certificate for non-dividend paying stock 
has over a receipt for a defaulted bond ; while there 
are many advantages that the receipt for a de- 
faulted bond has over the certificate for a stock 
which is not yet paying a dividend. Therefore, 
the facts regarding defaulted bonds, which the 
ordinary investor considers disadvantages and 
which cause these bonds to sell below this intrinsic 
value, are in many cases not disadvantages for the 
man with independence, courage, patience and who 
is willing to make a study of investments. 

Great Profits in Defaulted Bond Issues. 

Thus for men with courage and independence, 
there are possibilities of great profit in the study- 
ing of defaulted bond issues. In fact, for the man 
who is willing to spend money on obtaining en- 
gineers' reports, legal opinions and other data, 
there is no other method whereby a fortune can be 
amassed so quickly and legitimately as through the 
purchase of defaulted bond issues. Furthermore, 
this is not mere opinion, but a statement to which 
nearly every reorganization bears witness. It 
makes little difference whether you study the re- 
organization of our great railroad systems, such as 
the Union Pacific, ^N'orthern Pacific, and the Atchi- 
son, where the securities which were received for a 
$10 assessment were later worth $100 to $200, 
or whether you consider the reorganization of our 



DEFAULTED BONDS 307 

great industrials like the General Electric, which 
has been a gold mine ever since the readjustment of 
its capitalization in the 90's. Study our traction 
lines, electric light plants, and all public utilities 
which have been reorganized. It would be hard, if 
not impossible, to find a single instance where the 
holder of an underlying bond who has stayed hy 
the reorganization is not as wJi or better off today. 
Of course, this does not apply to holders of stock — 
either preferred or common. It does not always 
apply to holders of junior liens, but it should be 
remembered that only underlying liens are the 
most advisable to purchase. 

It will be well, however, to repeat that the in- 
telligent purchase of well-secured, defaulted bonds 
at a time when the holders thereof are becoming 
discouraged, offers a great opportunity for service 
and consequent profit. Of course, this service must 
be performed with intelligence and be based on 
fact, and not on either optimistic or pessimistic 
brokers' rumors. When an investor is assured of 
the facts and purchases on the honest advice of one 
who has made a thorough and impartial study of 
the situation, he has a real opportunity of using his 
money in the performance of a real service. This 
service consists of purchasing these bonds when the 
holders thereof are discouraged, panic stricken and 
fearful of assessments, disaster or total loss. This 
is a time when the able, independent investor can 
perform a real service by stepping into the breach 



308 BONDS AND STOCKS 

and checking the "panic" in said securities and for 
this real service he will, when the reorganization is 
completed, be paid a handsome profit in addition to 
a fair rate of interest on the money which he has 
invested. 



CHAPTER XVIII. 

COPPER STOCKS. 

ALTHOUGH today Boston is not exactly 
the home of coppers, yet it was until a 
few years ago, and is still to a limited 
extent. As our Pacific railroads were originally 
financed from Boston, so has the large copper in- 
dustry of our nation been financed from the same 
city. On the other hand, as Boston has now lost 
her grip on the transcontinental situation, it having 
passed to 'New York in conjunction with the great 
telephone industry, so the new copper properties 
are now being financed from E'ew York rather 
than from Boston. 

The transcontinentals were financed from Boston 
because that was the investing center of the coun- 
try fifty years ago, and whether railroad bonds or 
government bonds were to be sold, they w^ere first 
offered to ]^ew England people through established 
Boston firms. The telephone industry was started 
in Boston probably because llr. Bell, the inventor, 
was a New England man. The first company was 
organized in a little office in Boston. The huge 
profits made by these early investors in telephone 
stocks were sufficient to cause them to hold the in- 
dustry for many years and continue to raise funds 
for its great expansion until it became so tremend- 
ously large that it was of necessity a national rather 
than a Xew England enterprise. 

In the same way, the copper industry took root 



310 BONDS AND STOCKS 

in Boston probably on account of the great success 
of the Calumet & Hecla mine. This was one of the 
early Lake properties, capitalized at a par value of 
$25 a share, and originally sold to investors for 
considerably less. As it happened, many Boston 
investors bought this stock at from $10 to $25 a 
share, from which price it gradually soared to 
$1,000 a share and for a considerable time has sold 
for from $500 to $800. When one realizes that a 
person who invested only $10,000 in this stock at 
$10 a share could have sold out a few years ago for 
$1,000,000 in cash, and that on these 1000 shares, 
bought at $10 a share, he some years received a 
dividend of $100,000 (or 400%), is there any 
wonder that coppers should have become a favorite 
investment for Boston people ? 

Unfortunately, however, there has been only one 
"Calumet & Hecla,'' and although Boston people 
have made millions and millions of dollars from 
the Calumet & Hecla stock, yet many of them have 
probably lost in other mines and therefore are no 
better off today than if they had never invested in 
the famous Hecla Mine. This therefore, brings us 
to the main point to be emphasized, which is : TO 
INVEST IN^ ONE OR TWO COPPER MINES 
IS ONE OF THE RANKEST KINDS OE 
SPECULATION AND SOMETHING THAT 
SHOULD BE SHUNNED BY EVERY IN- 
VESTOR. Only as one invests in several produc- . 
ing mines does his purchase more nearly approach 
an investment, and the speculative element become 
gradually reduced. At the same time, however, 



COPPER STOCKS 311 

the possibility of profit decreases as the possibility 
of loss decreases, and finally, the investor is no 
better off than if he should confine his purchases to 
established dividend-pa^dng, railroad stocks which 
he could buy without any trouble and worry. 

Four Classes of Stocks. 

It is well, however, for the investor to under- 
stand the different kinds of copper stocks, for there 
is a vast difference in those being off'ered. There 
are good cojDper stocks, poor copper stocks, medium 
copper stocks and copper stocks which are a dis- 
grace for anyone to own. Briefly these may be 
divided as follows, but changes constantly occur. 

1. Producers and dividend payers. 

This class includes such stocks as Calumet & 
Hecla, Amalgamated, Anaconda, Chino Copper, 
Calumet & Arizona, Nevada Consolidated, Old 
Dominion, Utah Copper, etc. These are all estab- 
lished mines which are not only producers, but are 
producing a sufficient profit so that dividends may 
be paid on the stock, and they are the only kind of 
stocks which conservative bankers ever recommend. 

2. Producers and non-dividend payers. 
There is a larger number of these than of the 

first mentioned class and the following are a few 
examples: Braden, Allouez, Inspiration Consol- 
idated, Franklin, and Xason Valley. These rep- 
resent established mines which are producing cop- 
per, but either they are not sufficiently developed 
or else are not producing the copper cheap enough 
to be able to sell it for a profit. It would not be 



312 BONDS AND STOCKS 

wise to state that these stocks should never be pur- 
chased, as at any time something may be found to 
make them valuable, and if the price of copper 
sufficiently increases, many producing mines not 
paying a dividend at the present time would then 
be able to pay one. The stocks in the first men- 
tioned class are practically sure of some profit, as it 
is almost beyond probability that the price of cop- 
per will for many years be less than what it costs 
these mines to produce it, and future changes in 
the price of copper will simply increase or decrease 
the profit. 

In the case of this second class of stocks, how- 
ever, when the price of copper is low, many of them 
make no profit whatever, which is a very much 
more serious matter. This is due to the fact that 
— strange as it may seem — it is more expensive to 
shut down a mine than to operate it. Consequently 
there are many mines today which are being oper- 
ated at no profit, and yet are becoming less valuable 
every day as the copper is removed therefrom. 
This again brings us to another point which should 
be emphasized, namely, that the dividends received 
from mines are not real earnings as are the divi- 
dends received from a railroad or industrial cor- 
poration, hut these copper dividends are simply 
small portions of the principal, which are gradual- 
ly being returned to the stockholder. Therefore, 
it is very much better to purchase only the very 
best mining stocks in order that some' dividend may 
be received as long as the mine is being operated, 
whatever the price of the metal. 



COPPER STOCKS 313 

3. The third class of stocks are what are known 
as ''Developments." 

These are stocks of companies which are sure to 
become producers and which all hope will some day- 
be dividend payers, but are not yet sufficiently 
opened for actual production. In some cases, the 
underground workings are complete, but the com- 
pany is waiting for the completion of a smelter, or 
for the completion of a railroad, or some other 
adjunct to the property. Possibly stocks like 
Braden Copper could be classed in this list. Such 
companies are approaching production but are not 
yet real producers and may or may never be divi- 
dend leavers. However, it is known that such com- 
panies have vast quantities of copper and it is only 
a question of getting out this copper at a low 
enough cost. 

This class is generally known on the street as 
^ ^comers," and the average stock broker will tell 
you that there is more profit in buying these '^com- 
ing properties" than there is in buying the older 
and better known properties. It is probably true 
that there are greater profits to be made in stocks 
of this third class ; but it also is very true that there 
is a very much greater opportunity for loss. 
Therefore, stocks of the first or second above men- 
tioned classes are preferable to those of this third 
class, except in two or three special instances. In- 
vestors will be interested in noting the following 
stocks listed on the Boston Stock Exchange, the 
majority of which come under these last two 
classes : 



314 BONDS AND STOCKS 

Mining Companies. 

Adventure Dominion 

Allouez Osceola 

Arizona Com. Parrot 

Butte Coalition Quincy 

Calumet & Arizona Santa F§ 

Calumet & Hecla Shannon 

Copper Range Shattuek-Arizona 

Daly-West Superior 

Franklin Tamarack 

Granby Trinity 

Mayflower U. S. Smelting 

Michigan Utah Con. 

Mohawk Utah Copper 

Nipissing Winona 

North Butte Wolverine 
Old Colony 

4. The fourth class is Icnoiun as ''Prospects/' 
In most cases the assets of such companies con- 
sist mostly of land, although in many instances 
considerable development work has been done. In 
no case, however, is it known just how much ore 
the mine contains and in many cases it is not 
known for a certainty whether or not there is any 
ore, and surely it is not known how much it will 
cost to mine the ore. Usually the only argument 
or reason the owners have for calling the prospect 
a mine is that the property is near some land which 
is now being worked as a mine. Certainly the pur- 
chase of such stocks is pure gambling. Yet today 
the maJ4>rity of mining stocks belong to this fourth 
class. It is simply gambling in its most element- 
ary form to buy stocks in this group, and why the 
United States governrnxcnt will permit the circula- 
tion of advertisements of such mining stocks and at 



COPPER STOCKS 315 

the same time prohibit the mailing of lottery tickets 
is unexplainable. 

Mind joiij there is no harm for any man to buy 
a piece of land and spend money in ascertaining 
whether or not it contains ore. This is an honor- 
able undertaking and such a man is performing a 
distinct service to our nation in endeavoring to dis- 
cover its wealth and provide labor for our people. 
Such a man, however, would purchase the land not 
on the basis that it contains ore, but on a proper 
basis corresponding to the risk involved. If the 
land contains ore, he makes a handsome profit 
which he deserves ; but if it does not contain ore, he 
simply loses the money which he spends on the 
development, while he still has the land and the 
experience. The inexperienced investor, however, 
who purchases the stock of a company owning such 
a prospect, from some advertisement in a news- 
paper, buys it on the assumption that the land con- 
tains ore. He is assessed further for development 
work, and if, as in nineteen cases out of twenty, 
there is no ore, his savings are absolutely lost. The 
following is another list of stocks clipped from a 
Boston paper, some of which are probably good, but 
most of which belong to this fourth class. Con- 
sidering the much higher prices that some of these 
stocks were originally gold for, it is figured roughly 
that at these present prices, they must show a total 
loss to the purchaser of nearly $100,000,000. 
Moreover, most of the purchasers of such stocks are 
poor people who cannot afford to lose the money. 



316 BONDS AND STOCKS 

Boston Curb Quotations. 

Ahmeek McKinley-Cobalt 

Bay State Gas Mexican Metals 

$1000 Berry Spring 6s Mines Co. of America 

Boston Ely , Nevada- Douglas 

Calveras Nevada-Utah 

Corbin Porcupine Gold Mining 

Davis Daly Porcupine Northern 

First National Copper Raven 

Goldfield Cons. Rhode Island Coal 

Kruger Ray Central 

Lion Hill South Lake 

La Rose Yukon Gold 

Majestic 

Four Kinds of Mines. 

As there are four classes of stocks, there are also 
four groups of mines, although there is absolutely 
no relation between the four sub-divisions first 
above mentioned and the four now about to be out- 
lined. When stocks are discussed they are divided 
as to their progress and record ; but when mines are 
discussed they are divided as to the kind of ore 
which they contain. Briefly, three groups are 
based upon three varieties of copper ore, and the 
fourth group might be entitled ' 'Miscellaneous.'' 
This latter group will not be described here. 

The kind of copper to be discovered first was 
what is known as the ^'native lake" copper. This 
has been found in great quantities around Lake 
Superior, especially in Michigan ; and the Calumet 
& Hecla is the best illustration of this kind of a 
mine. The copper is found practically in a raw 
state, almost identically as it later appears in the 
form of manufactured wire or on the bottom of a 



COPPER STOCICS 317 

wash boiler. It is usually necessary only to break 
up the rock, take out this metal, stamp it and it is 
ready for use. This is the form of copper used by 
the Indians hundreds of years ago, and when first 
discovered, the mining was very simple. As years 
have gone on, however, the mining has become 
more difficult, it being necessary to go to great 
depths in order to find the metal." Many people 
believe that the day of Lake mining is nearly over 
and some Boston men strongly advise against the 
purchase of any Lake stocks. Many of these stocks 
have declined in price, such as, for instance. Tama- 
rack, which at one time was considered a prosperous 
mine, has dropped from $363 to $20 per share. 
Calumet &.Hecla stock which once sold for $1000 a 
share later sold for $400. Another well-known 
''Lake" stock is Copper Eange, but an unfavorable 
report has recently come out even on this property. 
What the real facts may be relative to these Lake 
coppers is of course uncertain; their value, how- 
ever, is not a thing of the past by anj^ means, and 
many of them have a long and profitable future. 

The second step in the development of the copper 
industry came through the use of what is common- 
ly known as ''sulphide ores." This sulphide group 
of mines is centered about Butte, Montana. 
Although similar mines are found in various parts 
of the country, including Arizona, yet the Butte 
camp leads this class as the Michigan mines lead 
the native-copper group. These sulphide ores are 
found in veins ; but the novice would never dream, 
from looking at the dull ore, that it contained cop- 



318 BONDS AND STOCKS 

per. To get this copper out it is necessary to smelt 
the ore, or subject it 20 a chemical process. The 
Amalgamated mines are one of the best illustra- 
tions of this groupj but there are several examples 
of good paying properties being operated along 
these lines. In fact, the bulk of the production of 
copper probably comes today from this character of 
mining. 

This third group is known as the "porphyry 
group.'' For many years it has been known that 
land in certain parts of this country contained a 
small percentage of copper; but until recently it 
has never been thought economically possible to 
extract the copper because only such a very small 
portion of ore can be obtained from a ton of mate- 
rial. Chemists and metallurgists have gradually 
perfected the process, and now great mountains are 
being torn away with steam shovels and the copper 
extracted. Probably the most prominent example 
in this country today of a mine of this porphyry 
group is that of the Utah Copper Company located 
near Salt Lake City. Other mines such as Miami, 
Chino and Inspiration are being developed along 
this same line. The theoretical production of such 
mines is tremendous ; but their appetite is so great 
and they use so many thousands of tons of material 
each day that it is questionable whether or not they 
will be very long lived. 

In short, it was the developing of these great 
porphyry, low-grade, steam-shovel propositions 
which is disturbing the copper market and which 
in the past, has caused copper to fall from 



COPPER STOCKS 319 

twenty-four cents to twelve cents per pound. 
Whether the success of these porphyry mines will 
long continue is a question that only the future can 
decide. There is no doubt that these low-grade 
mines are producing ore today and are producing 
it very cheaply, the Utah Copper Company's re- 
ported cost said to be less than nine cents per 
pound ; but because they or any other company can 
produce copper at such a price today is no reason 
why they can expect to do so ten or twenty years 
hence. However, the owners of porphyry mines 
claim that the Michigan mines will be abandoned 
in twenty years and that native copper will be a 
thing of the past ; while the owners of the Michigan 
mines claim that the low-grade porphyry mines will 
soon be exhausted and that the native Lake coppers 
will be mined for scores of years to come. 

Whichever of the three groups are longest lived, 
this discussion certainly should illustrate to the in- 
vestor the great risk there is in all copper stocks ; 
for, when doctors disagree, what hope is there for 
the poor patient ! Of course, many shrewd Boston 
bankers claim that an investor can protect himself 
by purchasing a moderate amount of each of the 
three groups, this is true, provided it is done in 
conjunction with a careful study of fundamental 
business conditions. However, it must not be 
supposed that copper stocks or any mining stocks 
can be purchased as good railroad stocks can be 
purchased, locked up in a safe deposit box, and 
forgotten; but rather should be purchased only 
with the idea of some time selling again. 



320 BONDS AND STOCKS 

This brings us to the bottom of the entire ques- 
tion, namely, ivJien an investor takes a dividend 
from a copper or other mining stock it is like tak- 
ing apples out of a barrel. Although the average 
investor thinks that he is spending his ^^dividend," 
he is in reality spending his principal. For this 
reason mining stocks should yield about nine per 
cent to compare favorably with a railroad stock 
yielding five per cent. When the investor receives 
his $9 a year on an investment of $100, he should 
religiously set aside $4 for a sinking fund as his 
original investment is theoretically worth about 
this much less. Of course some few companies off- 
set this great shrinkage by purchasing additional 
ore lands, or buying water powers, or by investing 
in the stocks of other companies; but the average 
company does not do this, paying out as they go all 
profits for dividends. 

This chapter has not entered into any techni- 
calities, and in fact, has omitted several features, 
yet certain statements connected with the purchase 
of copper stocks are self evident. In applying 
these statements, the investor may use the follow- 
ing four rules : 

(1) Purchase the stocks of producing, and if 
possible, dividend paying mines. 

(2) Divide the investment equally among the 
mines of the above mentioned groups. 

(3) Insist upon a yield which will provide for 
laying aside each year a proper proportion of the 
dividends for a sinking fund, or else purchase the 
stocks only of companies which, of themselves, set 



IJ75 1876 1877 



1879 



3t.. 



1880 1881 



1882 






1884 



1905 



l!„„ ^. ?u^ '^''^" *^^ production 
line gives the production of pig ■— 
iron and the lower broken - 



Copper and Pig Iron 1874=1912 



of copper by years is shown by the upper dotted line, while the solid 
1. The lower solid line represents the average wholesale price of pig 

Thooo „i„» , °* *"" average wholesale price of electrolytic copper. 

rather than coinr)rt«i,7^*h?,?*'!?^ '°'" ^'' Pi'rposes: first, for showing that the demand for copper Mh-.os 
of pig iron after i^iwH^ V"! ''''"""«» f<'' P'S i™n: secondly, that although an increase in the production 
ate^y foHow vet ?n^ ? ."' depression, signifies that a period of prosperity may be expected to immedi- 
This Plot however c.uk'' P™^uction of either pig iron or copper is significant of a panic to follow, 
rometer bu? mu/t'hi . ^^°r 'i"** ^^^ production of pig iron alone cannot be depended upon as a ba- 
rometer, but must be considered only in conjunction with all the other subjects. 

lofiical Surve?fnr ?Ji'!!!,"h'' " "'"* '' ''"^^'^ "" ** figures given annually in the official report of the Geo- 
logical Survey for caler^dar years, and Includes all grades and kinds of copper mined in the United States, 
riotted and published in connection with Babson's Reports on Fundamental Business Conditions. 
Compiling Offices: Wellesley HUls, Mass. 



& 




stocks only of companies which, of themselves, set 



COPPER STOCKS 32i 

aside a proper proportion of their earnings for the 
acquirement of additional property. 

(4) Purchase stocks when the price of copper 
is at or near its lowest point. Of course, to decide 
this latter question one should be thoroughly famil- 
iar with business conditions and much more of a 
student than is the ordinary investor. The an- 
nexed chart, clearly shows both the price and pro- 
duction of copper during the last thirty-five years, 
and when studied in connection with the price of 
iron and other commodities, it will be found very 
helpful. 



CHAPTER XIX. 

MINING SECURITIES. 

JOSH was a prospector of the type so common- 
ly seen in Arizona, the land of sand and sage- 
brush. He was a tall, slim creature of the 
soil with skin as tongh as leather, bnt with a big 
bounding heart. Originally, Josh was a boss miner 
working at a fair salary in one of the well-known 
mines ; but as he became more prosperous he mixed 
with the temptations of Bisbee, Tuscon and other 
mining centers and, unfortunately, became ad- 
dicted to drink, losing his good position. The rest 
of his life has been similar to that of the average 
prospector; work for a few months was only to be 
followed by dissipation for a month or six weeks, 
and then a period of repentance and discourage- 
ment. At the end of one of these periods, some 
good friend for whom he formerly worked, ^ 'grub- 
staked" him and sent him into the mountains to 
prospect. 

Practically, this was simply a matter of charity 
because only one prospector in a hundred 
makes good. Josh returned from one of these 
prospecting excursions lasting a couple of months 
with some samples of ore, claiming he had ^'almost 
struck it rich" (which is the common report re- 
turned by most prospectors as they come in). The 
ore was thrown into a box, and he was told that he 
had done first-rate. Josh, however, was not quieted 
so easily, but kept returning, stating that he could 



MINING SECURITIES 323 

purchase from some Indians the entire claim from 
which this sample came, for only a few hundred 
dollars ; and urged the purchase. The twenty-four 
years spent in the hills of Arizona had, however, 
made one of his benefactors very wary of these 
^^ricli strikes," so he refused to pay any attention to 
the earnest pleadings, and Josh went to work again 
on day wages. 

Eeaders may imagine the surprise caused, when 
about two years later, a new company was formed 
by some of the best men in Boston, and capitalized 
for $2,500,000 for the purpose of developing this 
little piece of property which Josh could have pur- 
chased for a few hundred dollars. At first this 
stock sold for about $5.00 per share ; but suddenly, 
a great pocket of very rich ore was discovered, and 
in a night — so to speak — the price of the stock 
soared to $25.00 per share, from which price it 
gradually climbed to nearly $200 per share. More- 
over, this stocl^ is to-day traded in on the Boston 
Stock Exchange and is even now considered one of 
the best copper purchases. 

Mining StocJcs vs Mining Properties. 

The object in telling this story is twofold. First, 
to explain to the readers the difference betw^een 
buying stocks and buying land; and second, to 
show how even the very ablest engineers are 
^^fooled" as to actual conditions. 

Everybody is somewhat acquainted with mining 
stocks, — at least all are who read the Sunday 
papers, which seem to be the leading market place 



324 BONDS AND STOCKS 

for these valueless promotion offerings. Many 
readers have doubtless received through the mail 
alluring circulars offering mining stock from $1.00 
to $5.00 per share which, according to the circular, 
^^may soon become worth several hundred dollars 
per share." Or, to quote from one of these circu- 
lars : ^^If you will now buy 1000 shares at $1.00 per 
share, when this stock becomes worth $100 per 
share (the average price of most stocks) your 
$1000 will become $100,000 and your income each 
year will be several times your original invest- 
ment." Of course, in reading the advertisement 
the small investor entirely forgets the fact that the 
average stock selling at. $100 per share has a par 
value of $100 and not $1.00, as in the case of the 
mining stock in question. Such an advertisement 
is a fraud on its face. 

It is, however, very difEcult to suppress these 
advertisements, for they are prepared by expert 
advertisement writers with the advice of the ablest 
lawyers and with the knowledge that the advertise- 
ments will be scrutinized by Post Office authorities. 
Certainly, anything that said authorities can "nail" 
will bar the advertisements from the mail. The 
use of the simple word "may" instead of the word 
"will" in the above advertisement renders the Post 
Office authorities powerless, and the advertisement 
still succeeds in separating the small investor from 
his money. 

There are various reasons why the ablest bankers 
advise against the purchase of such stocks; the 
more important is that owing to the many men on 



MIXIXG SECURITIES - 325 

the ground fully acquainted with the property, 
these stocks, when there is any reasonable chance of 
their ever becoming of value, are taken up long 
before they ever reach Xew York, Philadelphia or 
Boston. The people of Arizona are not poor^ and 
there is just as much money per capita in the State 
of Arizona looking for an investment as in Boston, 
Philadelphia, i^ew York or Chicago. The Arizona 
man, however, does not make money from the pur- 
chase of stocks, but rather from the purchase of the 
land itself. If you were to buy a farm, you would 
not capitalize it and endeavor to sell the stock, but 
would simply work it as a private proposition, rais- 
ing crops, paying the expenses and retaining the 
profits. 

If you should discover a small piece of land in 
Arizona, or in any other state, which you believed 
could produce ore, and which would require only 
the digging of a shaft — as a mill nearby can often 
be used for treating the ore, — ^vhy should you 
want to capitalize it and give the public such a good 
thing? Why would you not develop and work it 
yourself the same as you would the farm ? Well, 
this is the way the Arizona man enters mining. 
He stakes out a claim, agrees to spend at least $100 
a year on development, and holds the title to that 
claim, gradually working it as you would work the 
farm. If he is a man of wealth, he may have a 
large force of men and expensive machinery; but 
if he is poor, he will have only two or three work- 
ing for him, hut he ivill mahe proportionately as 
much. As he digs this ore out of the ground, he 



320 BONDS AND STOCKS 

hauls it to a mill and sells it either before or after 
it has been treated. 

How the Best Engineers FaiL 

Even in buying the land, one does not eliminate 
the possibility for loss ; for, as has often been said : 
^^Almost as much money has been put into the 
ground as has ever been taken out of it." Out of 
possibly twenty men who have devoted their lives 
to the development of mining properties, not more 
than two have anything left to show for their 
efforts. The competition for these claims is very 
keen; large companies, such as the Phelps-Dodge 
interests, the Cole-Ryan interests and others, have 
engineers continually in the field seeking new pro- 
positions. Moreover, it is necessary to spend con- 
siderable money to break out any claim before one 
knows whether or not he is to receive anything in 
payment for his labors. Therefore, even for the 
man who deals only in land and is located on the 
ground, it is a hard up-hill fight amidst keen com- 
petition, subject to the greatest discouragement. 
Of course, this works two ways. In some years, 
the engineers of the great mining and smelting in- 
terests get all the prizes, while the prospectors and 
independent miners get none; but in other years, 
these great engineers themselves fail while the 
^ Opiums" come to the small miners. 

One of the large interests — if not the largest — 
in the world, the Phelps-Dodge, owns and has 
owned ever since it was a raw prospect, a mine 
known as the Copper Queen. This mine was re- 



MINING SECURITIES 327 

garded by them as the one mine of the Bisbee camp 
in Cochise County, Arizona, and it turned into the 
coffers of the Company millions of dollars annual- 
ly. Some plain native prospectors located claims 
adjoining the great Copper Queen; and what is 
more, they offered to sell them to the great Phelps- 
Dodge interests for a trifling amount. The Com- 
panj^ engineers looked at them, and ^^nothing 
there," was the verdict. 

A little later these same prospectors disposed of 
the claim and a great new mining company w^ell- 
kno^\TL throughout the world is the result. Already 
it has paid out in dividends over ten million dol- 
lars, and the property of the Company is now said 
to be as valuable as the Copper Queen itself. Still 
the Phelps-Dodge people looked far afield, and 
other prospectors made locations adjoining on yet 
another side of the bonanza. Again the great en- 
gineers investigated the matter and shook their 
heads. ^^Xothing there," was the reply again. 
But, another — now well-known — mine immediate- 
ly opened up a great ore body, blocking out some 
fifteen million dollars' worth. One other mine 
which those same experts are said to have looked at 
and declared "worthless" is the United Yerde. It 
was offered later to a gentleman in Montana, and 
taken. The United Yerde is today recognized as 
one of the world's great mines and enriches him by 
millions yearly. The idea that the prospects of 
Cripple Creek would ever develop into big produ- 
cers was pooh-poohed by men at the head of the 
profession. But Cripple Creek has poured out 



328 BONDS AND STOCKS 

gold by the hundreds of millions of dollars since 
that day, and is still turning its golden stream 
into the channels of commerce. 

Such mistakes perhaps do not happen often ; but 
it is well to say ^^perhaps," for who knows what the 
future may unfold ? Prospectors, years ago, passed 
by many a mine, the ear marks of which they did 
not see in the light of their limited information. 
The world progresses. The engineer and the pros- 
pector are keeping abreast of the times, and it is 
only reasonable to suppose that the greatest and 
most valuable opportunities of all are today lying 
idle and undiscovered, which could probably be 
obtained for only the small filing fee of a few dol- 
lars. 

Is there any formula by which the average man 
can separate the wheat from the chaff when it 
comes to the selection of mining stocks ? The ques- 
tion has been asked a thousand and one times in the 
past, and the answer given has been most perfunc- 
tory and unsatisfactory. So the question is yet 
before the public and there to stay until such a 
formula is produced. If a broker is consulted on 
the subject, he will be able to give you some advice 
it is true, but that advice will not'be first hand, and 
though honest enough, must of necessity be fre- 
quently misleading. 

Like every other class of stock, mining shares 
may be divided into two broad classes, investments 
and speculations. Whether the man in the street 
is moved by the spirit of speculation, or a desire to 
secure a safe investment, he' naturally likes to know 



JOINING SECURITIES 329 

something about the mine. Investigation will then 
lead to still further investigation, and he will not 
go far into that most interesting subject before he 
realizes that woven into a business severely practi- 
cal are many strands of romance. 

The first inquiry on the subject is addressed 
most likely to a broker, who, if an investment is 
desired, will secure without difficulty a record of 
any mining company since the time it came before 
the public. Indeed, all the large, statistical organ- 
izations issue handbooks for the guidance of their 
customers, showing the high and low figures of the 
stock for a number of years, the rate of dividend, 
and miscellaneous data, such as the amount of 
capitalization, bond issues if any, output, etc. 

With the information thus secured as a starting 
point, the most natural question that arises is: 
''What is "a reasonable rate of interest to expect on 
a mining stock ?" The interrogation is a fair one, 
and whether addressed to a broker or a mine oper- 
ator calls for a straight-forward answer. The 
broker will doubtless say that it is difficult to give 
figures, and will quote such stocks as the folloAV- 
ing: Anaconda, which at 40 pays 5% or more, 
Calumet and Arizona at 48 has paid 8.33% and 
Kerr Lake which at 7 has paid 28% or more. These 
three dividend payers are selected as being differ- 
ent types of mining stocks, and good examples of 
how widely dividends vary. The broker will tell 
you this, or the information can be secured from a 
manual; but, having it, the seeker has only just 
started on his quest. Thus early will he part com- 



330 BONDS AND STOCKS 

pany with the broker for a while, and carry on his 
researches independently. 

If he knows a mining engineer, so much the 
better ; otherwise, he may find out the main points 
about the game by the exercise of his own common 
sense. To begin with, he will realize that a min- 
ing proposition stands in a class by itself. Long 
ago, nature placed just so much ore in that partic- 
ular spot known as the mine. At the time the mine 
commenced operations, there was a certain, if un- 
known, quantity. From that day the quantity has 
grown less, and will keep on decreasing until the 
original quantity of ore is exhausted and the mine 
closes down. The investor, therefore, will see that 
his interest must be large enough to provide a sink- 
ing fund; and all this must be calculated on the 
probable life of the mine. 

The same standards by which a farming or a 
manufacturing investment may be judged are not 
applicable to a mining investment. A farmer may 
earn 8% interest. on his capital, and with care, his 
property may increase in value. A manufacturer 
may earn 8% on his investments and if he keeps 
up his machinery, his business may be as valuable 
ten years, or even twenty years hence ; but a mine, 
after each dividend is paid, is that much nearer to 
its end. 

It is well known among mining men that tne 
average life of a gold or silver mine is under ten 
years. There are exceptions to this rule, of course. 
Great, low grade mines like the Homestake or the 
Treadwell, in all probability will be producing 



MIXIXG SECURITIES 331 

twenty-five or thirtj-five years licnce; but it is to 
the average mine that the law of averages applies. 
The exceptional mines are in a class by themselves, 
and can be judged accordingly. 

Gold and Silver Mines. 

Granting that the life of a certain gold or silver 
mine is to be ten years, in order to pay back prin- 
cipal and a reasonable rate of interest, dividends of 
at least 16% should be distributed. Mines of 
which statistics have been most accurately kept in 
Xew York and Boston offer many inducements to 
the investor, but too much care cannot be taken in 
the matter of selection, for stocks in not a few in- 
stances have been inflated out of all reason. 

As with gold and silver mines, so it is with cop- 
per and such mines, providing they have a good 
lease of life, 8% or even 10% may be regarded as 
only moderate returns. 

These are merely samjDles of some general prin- 
ciples to be considered. They may be utterly at 
variance with the opinions of many authorities, 
and attention may be drawn to the stock of such 
companies as the Amalgamated Copper Co., now 
paying in the neighborhood of 4% on its market 
value. To this the investigator is justified in 
remarking that the atmosphere of speculation has. 
given some stocks a higher market price than their 
returns warrant. The man who puts up hard 
earned money on an investment is well within the 
bounds of reason if, when offered a stock paying 



332 BONDS AND STOCKS 

only 7% dividends, he asks, ^^Has it thirty years 
life ahead of it ?" 

ISTow leaving the investment side of the subject 
and touching upon the purely speculative, the ques- 
tion of the formula presents itself again, and while 
admittedly it cannot be ansv^ered off-hand, at least 
some fundamental principles may be considered 
which will materially assist the speculator who asks 
no more than a '^square deal.'' 

New Mines. 

For purely speculative purposes, new issues are 
the most likely to be in demand. New issues have 
frequently made fortunes for the venturesome, and 
will ever be an attraction. It will be remembered 
that in the mine's early history, "Calumet and 
Arizona" sold for $5. Not so very long after- 
wards, as the life of mines is reckoned, it sold for 
e$198. It later declined to around the $45 mark. 
Calumet and Ilecla sold at the start around $25, 
and it has sold as high as $1000. Take the 
porphyry mines, under which heading are included 
Utah Copper, Miami, Ray Consolidated and 
Nevada Consolidated; these mines have all made 
money for those who bought the stocks in the early 
stages. But with them as they stand today may 
it not with reason be questioned if the milk has not 
been extracted from the cocoanut, and if they will 
not be fully occupied in keeping up their present 
positions ? 

The new ones coming, what of them? If the 
house bringing out the issue bears a good reputa- 



MmiNG SECURITIES 333 

tion on tlie "Street/' and its previous issues have 
made good, then there is a strong chance in favor of 
the last one. If, on the contrary, the firm has 
brought out many and all of them are yet in em- 
bryo, or worse still, have not made good, then the 
advice of an old Comstock miner, may be followed. 
"If you are a poor man, have nothing to do with it, 
and if you be rich, leave it alone." 

Scientific management, card systems and the 
like are important details in the business world, 
but it is impossible to eliminate the human factor, 
and where the human factor is, there is romance. 
Corporations are said to have no souls, but before 
corporations controlled, human factor was an issue. 
Again, before fresh mines are discovered and put 
before the public to invest or speculate in, as the 
case'may be, the human factor, the prospector and 
the miner might well be taken into consideration. 
They live today in the West as different from the 
pen pictures made of them in fiction as it is pos- 
sible to be. The mining engineer with a technical 
training that puts him "foremost in the files of 
time," stands side by side with the prospector on 
the bare rocks of the desert, and for the moment, 
they are on an equal footing. 

While you are looking over these pages, a pros- 
pect is being considered. That mineral is there, 
both engineer and contractor agree ; but does it go 
down and will it pay? These are questions that 
only work can tell. Xeither can see six inches 
below the surface. The mining engineer goes on 
his way. He deals in accomplished facts, and not 



334 BONDS AND STOCKS 

surmises like the prospects. The prospector works 
the claim. A pit is sunk, and the ore gives out. 
Another one is sunk with the same result, and then 
the prospector goes on his way. Time has been 
lost, labor lost, and money lost, but what of that ? 
He firmly believes that he is fated to strike it. 

Reverse the picture. The first pit had ore in it 
down to the bottom. A second is sunk with a 
similar result. Then a third or more, and a system 
of mineralization uncovered. 'No^Y comes the work 
of sinking the shaft, and that costs money. But 
the mine is a winner, and the prospector carefully 
selects the best of his ore, sacks it and ships it to 
the nearest custom smelter. With the returns from 
his shipment he operates, and slowly compared 
with what can be done with capital, he develops a 
mine. In time, the engineer returns to examine it. 
The system of mineralization having been un- 
covered and the ore shoots located, he is able to see 
beneath the surface, and can work out his plans. 
The mine now fetches a price out of all proportion 
to what the prospector would have taken for it 
years previous when the two stood on the cropping 
together. Here begins the history of the mine so 
far as the public is concerned, and the rest is for 
the broker and the investor. 

Of course, at the best, one may still be fooled. 
A young man who graduated as a mining engineer 
from Columbia University studied at the best in- 
stitutions of Europe and went to Arizona with 
probably the finest prej)aration that any young man 
ever had. In order to make doubly sure of his 



MINING SECURITIES 335 

position, he agreed with his father to spend a whole 
year in looking about for prospects before invest- 
ing a dollar. During the year, he travelled 
throughout most of the mining camps of Arizona 
and Utah and sifted his prospects do^\Ti to three. 
On the very day his first year came to an end, he 
visited the one of these three prospects which ap- 
peared to him as the most attractive. 

This was much more than a prospect as ore had 
been extracted from this mine for several months, 
and it was paying splendidly. 

For some days before the young engineer called, 
the owner of this mine had been getting rather 
nervous from fear that he had passed through the 
body of ore. He was just in this uncertain mood 
when the young engineer called down the shaft: 

"]\Ir. , I am now prepared to give you 

what I suggested for this property. If you will 
take it now, I am prepared to give you a draft on 
'Ne^Y York at once. Otherwise, I shall leave 
tonight for another camp and trade with someone 
else." At that moment the thought came to the 
miner to taste of the water. If the water should 
be clear and sweet, he would know that he had 
passed through the body of ore ; for otherwise, the 
water would be bitter and sulphurous. Thereupon 
he immediately stooped down, brought up a little 
water in the palm of his hand, tasted of it, found 
it clear as crystal, and called to the young man : "I 
accept your offer." The papers were exchanged at 
the bank of the town nearby, the young man in- 
vested thousands of dollars in extending the shaft 



336 BONDS AND STOCKS 

and on further development; hui he never found 
'paying ore. 

It, therefore, will be seen that to beat a mining 
game is a hard proposition. If you wish to buy 
stocks, you have not a chance to come in until two 
or three previous interests have already taken their 
profits, and even then with the promoters and 
brokers who are well versed in every art of manip- 
ulation and exaggeration against you, further- 
more, if you go to the mining country and purchase 
the land outright, you have the shrewdest miners 
trained with years of hard experience to encounter. 

Therefore, it is not only a safer proposition, hut 
one giving greater profit in the end, to confine 
one's purchases to simply the highest grade "listed" 
stocks of proven value, buying them when funda- 
mental statistics show that the country is entering 
a period of depression, and selling them two or 
three years later when fundamental statistics in- 
dicate that we are entering a period of prosperity. 
In this way the investor has his money always in 
conservative, established, dividend-paying invest- 
ments, or else in cash. This gives him a sure rate 
of interest and once in two or three years a good 
profit in addition. But the idea of buying untried 
and non-dividend paying mining stocks with a hope 
that "some day" they will become of great value is 
risky. Of course, as has been shown, there are 
cases where great profits have been made in min- 
ing; but for every one of these, several can be 



MININ-G SECURITIES 337 

named where fortunes have been lost. In brief, 
there is no "short sure road to wealth" whatever ; 
the only road being the one which is founded on 
knowledge obtained by a careful study of the under- 
lying principles of investments. 



CHAPTER XX. 

THE MONEY MARKET AND INVESTMENT PRICES. 

THE president of a large Xew York bank was 
once asked by a person having a large sum 
to loan, ^^How much, is money worth?" 
The banker replied by asking, ^^How much is a 
horse worth?" In retort the business man im- 
mediately answered, ^'A horse is worth what you 
can get for him." ^^Well," said the banker, ^^that's 
what money is worth." Now, this simple story is 
the fundamental principle underlying the money 
market, for in a given locality with fixed conditions 
and fixed collateral or credit, money rates are de- 
pendent upon the supply and demand. 

People who live in small cities or towns probably 
pay a fixed rate of interest year in and year out, 
averaging the so-called legal rate of 6%. Although 
there are certain wealthy and conservative sections 
of the country where the demand for money is 
fairly low and the rate only 5 % , there are sections 
in the E'orthwest and the South where the demand 
greatly exceeds the supply, and the normal rate 
greatly increases. In all places, however, the above 
rule applies, as money rates, when all other condi- 
tions are fixed, are ultimately dependent upon 
supply and demand. These ^'^other conditions" in- 
clude such features as the security offered, the 
credit of the borrower, general confidence, the 
length of time the loan is to run and various other 
considerations. 



THE MONEY MARKET 339 

This explanation is given primarily in order that 
the investor who is paying his local bank 6% or 
more may not be dissatisfied when he sees in the 
newspaper that money is being loaned in ISTew York 
and other large cities at from 2 to 4%. If a E'ew 
York bank were to loan you money, it would de- 
mand as high a rate — if not higher — than your 
local banks demand. When the ^ew York banks 
loan at the low, quoted rates, they receive collateral 
or security which insures that the note will be paid 
at the moment it matures, or if not paid, they can 
sell the loan to some other bank, and thus obtain the 
money any time desired. However, when a mer- 
chant in a small town borrows from his local bank, 
that bank will not sell him out if he does not pay 
his notes when they mature. In other words, the 
loans which the average country bank makes to 
local customers are, in a way, permanent loans, and 
such banks should always receive a rate almost 
double what l^ew York banks receive on collateral 
loans, which truly are ^^quick assets." 

There are two ways which banks have for mak- 
ing money ; one is by paying from two to four per 
cent on deposits and loaning the money at from five 
to six per cent, thus making a small difference 
thereon. This method is that which is used by the 
majority of country banks today, and is the reason 
why so many of these banks are just struggling 
along, the president working for a few hundred 
dollars a year and the bank's clerks depriving them- 
selves in order that the bank may eke out a small 
dividend. It takes no brains to pay a certain per 



340 BONDS AND STOCKS 

cent on deposits and lean the same money for a 
little more ; and in any work that does not require 
brains, there is a tremendous amount of competi- 
tion. 

On the other hand, there are a few banks which 
make money in a much more intelligent and justifi- 
able manner. These banks are practically mer- 
chants dealing in money as a commodity, storing 
up money when it is cheap, as the iceman stores up 
ice when it is plentiful, and then loaning out this 
money for the purchase of raw materials or high- 
grade securities when money is in great demand, 
and merchants and manufacturers are willing to 
sacrifice almost anything in order to obtain it. 
Such banks perform a great service to the commun- 
ity. They perform the same function to business 
that the governor on an engine performs in regulat- 
ing its speed, while the average country bankers 
who do not study fundamental conditions are prac- 
tically parasites on the community. 

Now, these country banks simply have use for 
time money and are interested simply in loaning it 
for as high a rate as possible at all times. It is the 
great city bank operated with judgment and along 
the lines above indicated, which uses call rates. 
When money is a drug on the market, these great 
city institutions loan it on call at a low rate, know- 
ing that the time is coming when it will be in great 
demand, and therefore they can best serve the busi- 
ness man by having the money ready for his instant 
use. On the other hand, when money is high and 
the financial situation is being cleaned up through 



THE MONEY MARKET 341 

failures and drastic liquidations, these great banks, 
knowing that the trouble is over, then loan their 
money on time and obtain a handsome rate, to- 
gether with special commissions for so doing. 

Eates in Large Cities. 

As most readers are probably more familiar with 
the money rates of their local banks than they wish 
they w^ere, we will not dwell further on this point, 
but will explain in a few w^ords the statement of 
the money market as it appears each day in the 
large daily papers of the country. 

'^Current quoted rates, bank clearings, etc., fol- 
low : 

Boston New York 

Call loans 4-1/2 @ 5 5 @ 5-1/2 

Time money — • 

Sixty and ninety days 4 3-3/4 

Four and six months 4 @ 4-1/2 3-3/4 @ 4 

Year money 4-3/8 @ 4-1/2 4-3/8 @ 4-1/2 

Commercial paper 4 @ 4-1/2 4 @ 4-1/2 

Corporation notes 3-3/4 3-3/4 

Today Year ago 

Bar silver in New York 55 .54-1/8 

Mexican dollars 46-1 /2 .46 

AT THE CLEARING HOUSE. 

New York funds par 

Exchanges, Boston $30,769,592.00 

Year ago today 26,982.729.00 

Balances 2,140.750.00 

Sub-treasury credit 18,590.00 

Exchanges, New York 310.043.209.00 

Year ago today 292 424.128.00 

Balances 18 316.548.00 

Sub-treasury credit 503,726.00 

New York banks lost on Sub-treasury opera- 
tions yesterday 1.4. =16.000. 00 

Net loss since Friday 6,546,000.00 



342 BONDS AND STOCKS 

Foreign Excliange. 

In the foreign exchange market today, sterling 
was easy and Continentals were practically un- 
changed. Afternoon rates^ actual business between 
bankers, as follows: Sterling — Cables, $4.8650; 
demand, $4.8605 @ $4.8610; sixty days, $4.8260 
@$4.8280; Commercial bills, $4.8160 @$4.8180. 

Francs, 5.20-5/8, less 5-64; marks, 95, plus 
1-64; guilders 40-1/4, plus 1-32.'' 

It will be noticed that the first reference is to 
"call" rates, and it will be seen that on said day 
call rates are a little higher in 'New York than in 
Boston. Now, when a man borrows on call, he 
borrows with the understanding that he must either 
pay his loan any moment the bank desires the 
money, or else he must accept any change in rate 
which the bank desires to make at any time. That 
is to say, the rate on call loans may be changed by 
the bank any day, and the borrower must pay either 
the said rate or his loan. During the greater part 
of 1911, call rates were lower in New York than in 
Boston, owing to the fact that during the larger 
part of the year, small banks all over the country 
had a large amount of idle money in the New York 
banks. Owing to the Fall and Christmas business, 
these banks withdrew money from ]^ew York dur- 
ing December, which made it necessary for the 
]^ew York banks to have some of their call loans 
paid in order to get the money to send west. To 
have said loans paid these banks chose the method 
of marking up their rates. As comparatively few 



THE MONEY MARKET 343 

country banks outside of New England carry ac- 
counts in Boston, Boston banks were not affected in 
this way, and therefore, the Boston rate for call 
money was not advanced as much. 

The next item refers to "time" rates. Time 
money refers to notes which are given for a definite 
period at a definite rate. When one borrows from 
a bank for sixty days, he agrees to keep the money 
for sixty days, and the bank agrees to let the rate 
remain fixed for sixty dsijs. In the case of time 
money the bank cannot advance the rate during the 
life of the note; but, on the other hand, the bor- 
rower cannot pay the note before it is due or have 
the advantage of any lower rate in case money 
should decline. In the case of call money, how- 
ever, although the bank has the privilege of calling 
and advancing the rate at any time, yet the bor- 
rower also has the privilege of paying up at any 
time, or insisting on a reduction in rate in case 
money becomes easier. 

The first three items under time money show the 
rate for different periods and illustrate very well 
why the country bank must have a higher rate for 
a "permanent loan" than the large city bank de- 
mands for active loans. (It will be seen that the 
large city bank demands about 1/2 of 1 % more for 
year money than for sixty and ninety day money. ) 
The last two items of the above clipping refer to 
commercial paper and corporation notes and sug- 
gest that corporation notes stand higher than ordi- 
nary business paper, as the banks are discounting 
these corporation notes at 3-3/4%, while they are 



344 BONDS AND STOCKS 

asking 4 to 4-1/2% on the business paper and 
collateral loans. 

Another interesting feature in connection with 
the above is that call money sometimes demands a 
higher rate than time money. By watching the 
relation between two rates, one may usually ascer- 
tain how the large bankers feel as to the course of 
money rates. When the rate for time money is less 
than the rate for call money on the same collateral 
and in the same city, one may usually be certain 
that the bankers of that city feel that rates are to 
continue easy and, therefore, prefer to loan money 
for long periods rather than to loan on call. On 
the other hand, when the rate for call money is con- 
siderably less than the rate for time money, as was 
the case during the summer of 1911, one may rest 
assured that the bankers feel that the rate for time 
money is abnormally low, and consequently that it 
is better to loan on call at a low rate than to tie up 
funds for from four to six months at a slightly 
higher rate. 

A Study of History. 

We find that there is a constant and intimate 
connection between monetary conditions and the 
prices of stocks and bonds. E'o market has con- 
tinued indefinitely upward in the face of high 
money rates, and the only cure for strained mone- 
tary conditions is a recession in business or an area 
below the country's line of normal growth. 

Ten high-grade investment stocks which the Bab- 
son Statistical Organization's ofiice daily records 



THE MONEY MARKET 345 

and whicli is a list extending back practically to the 
Civil War, sold in 1890 at an average high price of 
about $141 per share. At that time, the percent- 
age of loans to deposits was around 95%, while the 
percentage of specie to loans was about 20%. In 
the latter part of that year, however, the loans 
advanced to 102% of deposits, while specie de- 
clined to about 18% of loans. Moreover, this was 
accompanied — which is the point to be emphasized 
— by a decline in the average price of these stocks 
to $98 per share and a still further decline in 1891 
to about $95 per share. Furthermore, from 1891 
to 1893 almost every marked fluctuation in money 
conditions was reflected in stock market prices, and 
in 1893 the proportion of loans to deposits rose to 
109%, while the ratio of specie to loans declined to 
13%, accompanied by a drop in the average price 
of our ten stocks from $135 in 1892 to $98. 

This strange condition of affairs, however, was 
immediately corrected by an area of rest develop- 
ing below the nation's line of normal growth, and 
in the next year or two, loans to deposits fell to 
80% and specie rose to 30%, while the average 
high price of these ten shares increased to $128. 

Although the situation greatly improved during 
the next one or two years, yet conditions were not 
cured, and like a sick patient getting up too soon, 
business men unfamiliar with fundamental condi- 
tions, not being content to let the area of depres- 
sion sufficiently develop and mature, forced busi- 
ness too hard, and in 1896 sent the proportion of 
loans to deposits up to 102%, while the ratio of 



346 BONDS AND STOCKS 

specie to deposits fell to 10%. Certainly, this 
patient was quickly sent back to bed again, for con- 
ditions were immediately checked by the crisis of 
1896 when the average price of these ten invest- 
ment stocks dropped to $100. After this, affairs 
were allowed to take their natural course and the 
area of depression was allowed to naturally come to 
completion; and in July, 1898, loans were only 
83% of deposits, while the banks held specie to the 
amount of 30% of deposits, and the average price 
of these securities followed the example by advanc- 
ing from $106 to $133. 

In following conditions from 1900 to 1902, we 
find another area of prosperity developing above 
the country's line of normal growth with a corre- 
sponding increase in loans to deposits and a de- 
crease in specie to loans. In September, 1902, the 
proportion of loans to deposits was 99%, and the 
proportion of specie to loans about 17%, while our 
ten investment stocks reached an average high price 
of about $200 per share. 

To the student of monetary conditions, it was 
self-evident that this spelled trouble in capital 
letters, and such was the case, for in 1903 we had 
our ^'rich man's panic," when these conditions were 
readjusted and another area of rest began to de- 
velop below the line of normal growth, accom- 
panied by a drop in the average price of our ten 
stocks to about $150 per share. During this period 
of rest, the proportion of loans to deposits was re- 
duced to 90_%, while the ratio of specie to loans 
increased to 25%, accompanied by steadily advanc- 



THE I^IONEY ]\IARKET 347 

*ing prices of securities until an average high price 
of over $200 per share was reached in January 
1906. 

It is a shame that at that time more business men 
were not students of fundamental conditions, for if 
we had been willing to hold things in check, keep- 
ing down loans, building up our specie reserve and 
being content with a normal growth, the panic of 
1907 could have been avoided; but, unfortunately, 
this is not the American way of doing things. It 
is our nature to either have the throttle wide open 
and run at break-neck speed, or else have the throt- 
tle closed tightly and be at almost a standstill. For 
instance, in January, 1907, the percentage of loans 
to deposits had been increased to about 102%, 
while the relation of sjDccie to loans had been cut 
down, to about 17%, while our ten investment 
stocks still sold at an average high price of about 
$180 per share. Moreover^ a large area of pros- 
perity had been developing above the nation's line 
of normal growth — an area approximately equal to 
the preceding areas of prosperity and depression — • 
and nothing else could happen but a drastic liquida- 
tion in order to relieve these strained monetary con- 
ditions. What happened is well known to all. 
Our ^ew York banks were strained almost to the 
breaking point, and in fact, several of them did 
break. Large commercial institutions were forced 
into bankruptcy, and some of our great railroads 
were placed in the hands of receivers, while the 
average price of our ten stocks fell to $119 per 
share. 



348 BONDS AND STOCKS 

Again the readjustment process began, and as an 
area was developed below the nation's line of nor- 
mal growth, the ratio of loans to deposits decreased 
to 95%, while the ratio of specie to loans was in- 
creased to 22%, accompanied by an uplift in the 
prices of securities, and our ten stocks sold at an 
average price of over $190 per share in August, 
1909. Since that date loans again rapidly in- 
creased to about 100% of deposits, while the ratio 
of specie to loans dropped to 19%, and stocks 
had a very steady decline after August, 1909. 
It is not very encouraging when one realizes that 
all these foreign disturbances to business could have 
been avoided if we had been willing to study the 
money market and other fundamental factors upon 
which all manufacturing and commercial progress 
ultimately depends. 

Fundamental Principles. 

From the above facts, certain fundamental prin- 
ciples can be deduced which should be of value to 
every reader in diagnosing future conditions. It 
is very evident that the first thing to note in the 
Bank Statement — as published both by the Comp- 
troller of the Currency five times a year, covering 
all national banks, and by the Clearing House of 
I^ew York once a week, covering JSTew York banks 
— is these two most important items, viz. ; ( 1 ) the 
relation of loans to deposits, and (2) the relation of 
specie to loans. If we find that loans are in excess 
of deposits and the percentage of specie small, it is 
usually safe to assume that fundamentally the 



THE MOXEY MARKET 349 

monetary situation is unsound. On the other hand, 
if the percentage of loans to deposits is small and 
that of specie to loans is large, we may safely 
assume that our monetary conditions are funda- 
mentally safe. 

In other words, an increase in loans and dis- 
counts with no corresponding increase in cash 
usually reflects unsound monetary conditions, even 
if the advance in loans and discounts is fully offset 
by deposits. There are various reasons for these, 
but the simplest reason is that there are two classes 
of deposits ; namely, the real deposit and the credit 
deposit. When a miner in California takes gold 
from the earth and carries it to his bank for de- 
posit, that man is creating a real deposit, and the 
same illustration applies if the man who takes iron, 
copper, wheat or cotton from the ground deposits it 
or its equivalent. Such men are really wealth 
producers and their deposits are well worthy the 
name. Unfortunately, however, such deposits 
often form a very small proportion of the total, for 
by far the greatest number of deposits are what are 
knoT\rQ as credit deposits. These may come from 
a merchant taking a blank piece of paper and mak- 
ing thereon a note for $10,000. He then takes this 
note to the bank, discounts it for 5 % and the bank 
gives him back $9,750. The merchant then goes 
to another window of the same institution and 
deposits this money and the bank's deposits are 
immediately increased $9,750 while the local board 
of trade of the city points to the city's increased 
bank deposits, forgetting all about the correspond- 
ing, increased loans. 



350 BONDS AND STOCKS 

Real deposits should be welcomed, and such are 
the deposits which cause our nation's line of nor- 
mal growth to go upward; but these credit de- 
posits — although necessary to a certain extent — 
are our curse and an ultimate source of great 
trouble. Let us hope that the time will come when 
our Comptroller of the Currency will demand that 
these credit deposits be separated so that we may 
know how the bank is increasing its deposits in a 
given community. In the meantime let every 
reader look not at the deposits but at the propor- 
tion of loans to deposits, and especially at the per- 
centage of specie, which really means cash. 

It will be seen that the money market bears a 
very intimate relation to the welfare of the mer- 
chant and the business man as well as the investor 
and speculator. In fact, the relations could be 
carried on much further than outlined as above. 
The changes in the 'New York Bank Statement 
from week to week are scanned by many anxious 
faces; the surplus reserve item, which shows how 
much reserve the banks hold in excess of their 
legal requirements, is a figure especially watched. 
As is known, a country bank must carry a reserve 
of 15%, of which 6% must be in cash and the 
balance on deposit with some reserve agency ; banks 
in the sub-reserve cities must carry a reserve of 
25%, of which 12-1/2% must be in cash and the 
balance on deposit in a central reserve city ; while 
the banks in a central reserve city, such as New 
York, must carry 25% in cash in the vaults. If 
the total deposits of these New York !N'ational 



THE MONEY MARKET 351 

Banks are $1,000,000,000, they must carry $250,- 
000,000 in cash in their vaults. If they have 
$260,000,000 in their vaults, the ''surplus reserve" 
is said to be $10,000,000 ; and as this surplus re- 
serve decreases towards a vanishing point, it is a 
danger signal to all manufacturers, merchants and 
investors. 

Of course, the time of year must be considered. 
Owing to the demand in the crop moving season, a 
low reserve in November is not so dangerous as a 
low reserve in the summer, for we know that the 
call for money is then probably at a maximum, 
which is not the case in the summer. A very care- 
ful study of the seasonable changes has been made 
by Professor Kemmerer of Cornell, and the results 
of his analysis and certain other features of the 
normal changes in money rates are described in 
Mr. Ealph May's book on Commercial Paper re- 
cently issued. 

It often happens that certain periods of the year, 
such as January and July, call for the use of large 
sums in the payment of interest, dividends and 
other semi-annual disbursements. The first of 
April and October are also important dates in the 
money market ; but as we understand the analyses 
further, we must allow for more and more excep- 
tions ; and as these exceptions increase, the value of 
cast iron rules diminishes. Such studies are some- 
what like those of speculators who figure that the 
prices of stocks are always high at certain seasons 
of the year and low at other seasons. There is 
nothing in such doctrines. True it is that prices 



352 BONDS AND STOCKS 

have often been high, early in January and July, 
owing to the large investment buying at these 
times ; but every two or three years so many people 
figure on this and make their purchases a month or 
two earlier that there is a general decline in the 
market in January and July. 

In short, there is nothing in such cast iron rules. 
As to what month or year money rates will be low 
or high nobody knows, and the man who attempts 
to predict by naming the month is making a pure 
guess. What we do know is, that luhen money con- 
ditions are unsound, when credits are inflated and 
business unhealthy, and a large area of inflation 
has developed above the nation's line of normal 
growth, then money will be scarce and will con- 
tinue to be scarce until conditions are readjusted, 
loans liquidated and cash reserves strengthened, 
which can be accomplished only by the develop- 
ment 01 an area of rest, commonly known as a busi- 
ness depression. Therefore, investors are urged to 
study the relation of loans to deposits and the rela- 
tion of specie or cash to loans. 

This is not a popular doctrine to preach, and one 
may often be hailed as a "calamity howler" and a 
general pessimist for calling the attention of people 
to these cold and unpleasant facts, but nevertheless, 
they are facts, and our country's future business 
can be placed upon a permanent foundation only 
by an educational campaign along-these lines. On 
the other hand, to quote from a book which has 
recently been written on Wall Street: "There is 
one great check to education in this direction; 



THE MONEY MARKET 353 

great financiers who are most conversant with 
actual conditions seldom find it expedient to point 
out the facts. Sometimes they themselves, wish to 
dispose of their holdings because of the obvious 
peril ahead and this process would not be facilitated 
by gloomy predictions. On the other hand, it is 
too often the case that these same gentlemen, find- 
ing it to their great advantage to disperse sunshine 
until their notes are sold, point assiduously to the 
excellent business of the present, and neglect to 
touch on the irresponsible future, which, after all, 
is the most important question for the investor or 
speculator. '' 



CHAPTEE XXI. 

EFFECT OF GOLD PKODUCTION ON SECURITY PRICES. 

IF, by some magic method, each yard-stick in 
the world should increase ten per cent in 
length during a night, it would be necessary 
for all merchants using yard-sticks in the sale of 
goods to increase their prices on the next morning 
ten per cent, and yet this increase would mean no 
real increase in the cost of the goods to consumers. 
]^[ow, this illustrates the principle underlying the 
increase in prices due to the increased production 
of gold. Gold is the standard of value in the same 
way that the yard-stick is the standard of measure- 
ment, and as this standard of value is increased or 
decreased, prices must necessarily increase or de- 
crease correspondingly. Therefore, if the investor 
will grasp this first fundamental principle, he will 
have learned the relation between the increase in 
gold production and the increase in merchandise 
prices. The following table shows the production 
of gold during the past fifty years, and in a broad 
way, the world's price movement for raw materials, 
merchandise and labor corresponds thereto. If 
freed from outside arbitrary and artificial factors, 
especially the impetus to speculation caused by 
increased gold production, prices of raw materials 
and merchandise should correspond to the changes 
in the value of gold — or rather credits — with great 
exactness. 



EFFECT OF GOLD PRODUCTION 355 

Production of Gold in Fine Ounces. 

Date World United States Witwatersrand 



1860 


6,486,202 


2,225,250 


No report 


1861 


5.949,582 


2,080.125 


until 


1862 


5,949,582 


1,890,300 


1888 


1863 


5,949,582 


1.935.000 




1864 


5.949.582 


2.230.087 




1865 


5.949.582 


2.574,759 




1866 


6,270.086 


2,588,002 




1867 


6,270,086 


2,502.196 




1868 


6.270,086 


2.322.000 




1869 


6,270.086 


2.394,302 




1870 


6.270,086 


2.418,750 




1871 


5.591.014 


2.104.312 




1872 


5.591,014 


1.741,500 




1873 


4,653,675 


1,741.500 




1874 


4.390,031 


1,020.122 




1875 


4.716,563 


1,019,009 




1876 


5.016,488 


1.931,575 




1877 


5,512,196 


2,208.002 




1878 


5,761,114 


2.477,109 




1879 


5.262.174 


1.881,787 




1880 


5.148.880 


1,741.500 




1881 


4,983,742 


1,078.012 




1882 


4,934,086 


1,572,187 




1883 


4.614.588 


1,451.250 




1884 


4.921,169 


1,489.950 




1885 


5,245,572 


1.538,325 




1886 


5,135,679 


1,693,125 




1887 


5,116.861 


1,590.375 




1888 


5.330.775 


1,004.841 


190,266 


1889 


5,973,790 


1,587.000 


316,023 


1890 


5.749.306 


1,588,880 • 


407,750 


1891 


6.320,194 


1.004.840 


600.800 


1892 


7,094,266 


1,597.098 


1.001,818 


1893 


7.618.811 


1.730.323 


1.221.151 


1894 


8,764.302 


1.910.813 


1.037,773 


1895 


8.015.190 


2.254.700 


1.845,138 


1896 


9,783.914 


2,508.132 


1,857,071 


1897 


11.420,008 


2.774.035 


2.491.552 


1898 


13.877.806 


3.118.398 


3.502,813 


1899 


14.837.775 


3.437.210 


3,300.091 


1900 


12.315.135 


3.820.897 


395,385 


1901 


12.025,527 


3.805.500 


238,995 


1902 


14,354,680 


3,870,000 


1,691,525 



356 BONDS AND STOCKS 

Date World United States Witwatersran 



1903 


15,852,620 


3,560.000 


2,859,479 


1904 


16,804,372 


3,892,480 


3,653,794 


1905 


18,396.451 


4.265.742 


4.706.433 


1906 


19,471.080 


4.565,333 


5,559.534 


1907 


19,977.260 


4,374,827 


6.220.227 


1908 


21.422.244 


4.574,340 


6.782.538 


1909 


21.965.111 


4.821,701 


7.039,136 


1910 


22.023.178 


4.657,018 


7,228.588 


1911 


22.327,088 


4.687.053 


7,896,802 


1912 


e22,494,375 


4,520,719 


8,753,568 


e — estimated. 







The Gold Theory as Applicable to the 
Cost of Living. 

Of course, theoretically, the extension of our 
■ bank check system and the velocity with which our 
checks, bills, etc., circulate have the same effect to 
raise prices as increasing our gold supply. In fact. 
Prices or ^^P" as shoA\m in the following formula, 
are dependent upon the factors wdiicli have been 
worked out by Prof. Irving Fisher, of Yale Uni- 
versity, who has carried to completion some admir- 
able work by Prof. Kemmerer of Cornell : 

MY +M'V'=PT Therefore : P^^vofv 
In this formula 

M=Money in Circulation 

Y =Its Yelocity in Circulation 

M'=Deposits Subject to Check or ^^Credits" 

Y'=Their Yelocity of Circulation or 'Activ- 
ity" 

T =Yolume of Trade 

P ^Price Level 

which shows that as the factors M and M', or Y and 
Y' increase, P also increases and the price level 



EFFECT OF GOLD PRODUCTION" 357 

advances. As V is fairly constant, this means that 
the increased price level of today is practically due 
to the increase in money, M, (including gold, bank 
notes, etc.), to the increase in deposits subject to 
check, II', and to the increased velocity of circula- 
tion of these deposits or V'. The resulting increase 
in M'V is largely reflected in the great increase in 
bank clearings. 

Therefore, it will be seen that gold itself is only 
one factor and that an increase in credits of any 
form (that is, bank deposits subject to check), and 
especially an increase in the velocity of circulation 
of said moneys and credits, are also real factors. 
This last is very important for certainly one dollar 
circulating twenty times a year has the same effect 
as twenty dollars circulating only once a year or 
ten dollars circulating twice a year. As to Profes- 
sor Fisher's correctness, there can be no doubt so 
far as his reasoning refers to raising the general 
level of prices throughout the world. 

However, it should also be remembered that it is 
not only the raising of the prices of everything 
which is causing the present acute dissatisfaction, 
but rather the abnormal increase in the jDrices of 
certain necessities. In other words, as money grad- 
ually depreciates in value, there should be no 
social disturbance so long as wages, interest, rents 
and every commodity likewise increase correspond- 
ingly ; but when wages do not correspondingly in- 
crease, there is dissatisfaction. In the same way, 
although Professor Fisher correctly diagnoses the 
causes of the present uplift of the world's price 



358 BONDS AND STOCKS 

level, yet the above ^ ^equation" may not satisfac- 
torily explain the abnormal increase in the prices 
of a few necessities which have increased above the 
general price level. For the causes of inequality 
of such price increases, one may well refer to the 
writings of Professor Laughlin, of the University 
of Chicago. In brief, he states these to be as fol- 
lows: 

(1) Credit and Prices 

(2) Changes in Expenses of Production 

(3) Tariffs and Taxation 

(4) Wages and Unionism 

(5) Changed Agricultural Conditions 

(6) Monopolies and 'Trusts'' 

(7) General Extravagance 

(8) Speculation 

Why the Cost of Living Increases. 

As labor is in reality a commodity, the same as 
cotton, iron and foodstuffs, the price of labor should 
increase proportionately with the price of raw 
materials and commodities. Therefore, theoreti- 
cally, the clerk and laboring man need give no 
thought to the ''Gold Theory" or the increased pro- 
duction of gold. "Theoretically" because, as gold 
abnormally increases in amount and consequently 
depreciates in value, and the prices of groceries, 
provisions and clothes increase, so wages should in- 
crease in nice proportion. In other words, as long 
as the laboring man's wage increases correspond- 
ingly with the increase in the price of provisions. 



Kl'FECT OF GOLD TRODUCTIOX 359 

dry goods, rent, etc., he is neither worse off nor 
better off than before. 

Unfortunately, however, this is where there is a 
difference betAveen theory and practice. Owing to 
the organization and central control in business, the 
price of groceries, meats, dry goods, etc. are im- 
mediately adjusted to any change in the standard 
of value, — namely, gold ; but owing to the blindness 
of labor and the fact that many of our labor leaders 
so little understood fundamental economic princi- 
ples, the price of labor does not rise so rapidly as 
the price of commodities. This especially applies 
to non-unionized labor ; such as bookkeepers, clerks, 
school-teachers and other inside employees. Of 
course, in a ^vay, labor is very highly organized; 
but it is organized on the same principle as the 
Russian Empire, — namely, through the autocratic 
and unintelligent efforts of its rulers. To accom- 
plish good results, something besides brute force, 
arbitrajy rule and dynamite bombs is needed to ac- 
company organization. Russia is infinitely more 
organized than America; but give us America in 
which to live. 

All members of labor organizations should insist 
on electing educated leaders, men who understand 
the fundamental principles of economics. It might 
be well for every Central Labor Union in our large 
cities to have classes in "Applied Economics" in 
order that they might understand certain funda- 
mental principles relative to prices, wages and in- 
terests. This Avould also enable labor more often 



360 BONDS AND STOCKS 

to row ivith the tide instead of so often bucking up 
against it. 

Tlie reason wlij the capitalist and merchant are so 
often able to take advantage of the laboring man is 
simply because the capitalist has more brains. The 
capitalist raises his prices when fundamental con- 
ditions warrant it ; while he lets his prices sag when 
he sees that lower prices are inevitable, rather than 
arbitrarily hold them up. Many labor organiza- 
tions, not understanding these fundamental laws of 
trade and prices, miss the real opportunities of 
obtaining increased wages or better conditions, and 
very often strike at psychologically the wrong time. 
This is one reason why the price of labor has not 
always fluctuated correspondingly to the average 
price of commodities, and why so many salaried 
people are suffering today from the increased pro- 
duction of gold. 

Effect on Interest Eates and Bonds. 

Money, also, is a commodity the same as cotton, 
iron and foodstuffs. Consequently, if increased 
gold production increases the price of these latter 
commodities, it must also increase the rates of (or 
^^rent" for) money ; wdiich means that interest rates 
must increase as gold production abnormally in- 
creases, and this is nothing more than right or fair. 
For instance, a woman who is living on her income, 
if obliged to pay more for her groceries, rent and 
clothes, must of necessity receive a higher rate of 
interest (or ^^rent") for her money. Therefore, 
interest rates must increase Avith these other com- 



EFFECT OF GOLD PRODUCTION 361 

modities ; as oliould also be the case with labor. It 
is, therefore, fair to assume that so long as gold 
continues to depreciate in value, the rate of inter- 
est must continue to increase proportionately — 
provided that the general confidence of the com- 
munity and other factors remain the same. Grant- 
ing that the rate of interest will gradually increase, 
it is a simple matter to think how this will affect 
the prices of bonds and fixed interest-bearing secu- 
rities. 

For instance, the 4% bonds of the average large 
city of the Central West are now selling approxi- 
mately at par so as to yield investors 4% on their 
money; or, in the parlance of the trade, these 
municipal bonds are now said to be selling on a 
4% basis. If the gold production, (and this pos- 
sibly contemplates a large "IF"), is to continue to 
increase abnormally and interest rates for such 
loans increase from 4% to 4-1/2%, then these 
cities some years hence will be obliged to pay 
4-1/2% on these bonds in order to sell them at par. 
This change will affect all of their issues so that all 
of the bonds of said cities will then be selling on a 
4-1/2% basis. If a bond is today selling at par 
and on a Jf^o basis, the same bond must sell below 
par in order to yield Ji-1/2%. This means that 
all bond issues of said cities now outstanding may 
some years hence be selling for less than they are 
today. 

Whether or not this will happen depends on 
whether or not gold is to continue to increase 
abnormally and depreciate in value; and it is not 



362 BONDS AND STOCKS 

in the province of this article to discuss this sub- 
ject. Therefore, readers must be careful to note 
that it is not stated that bonds are to decline in 
price. In fact, so far as the immediate future is 
concerned, certain high-grade bonds will proba- 
bly tend to increase in price. Nevertheless, the 
thought underlying the theory is, that as the pro- 
duction of gold abnormally increases and thus de- 
preciates in value, the price of commodities and 
interest rates should likewise increase; and the 
'price of bonds and other fixed interest-hearing 
securities should decrease. 

According to this, the price of preferred stocks 
should likewise decrease in value, although this, of 
course, includes only such preferred stocks as now 
pay their full dividend and are thoroughly estab- 
lished and distributed. So far as this applies to 
certain high-grade preferred stocks, such as Union 
Pacific Preferred, C. M. & St. Paul Preferred and 
similar, seasoned stocks, this doubtless may be 
true; and if bonds decline in price, these high- 
grade, low-yielding, preferred stocks should like- 
wise decline in price. It will probably be a good 
many years, however^ before this law applies to 
such preferred stocks as United States Steel Pre- 
ferred, American Sugar & Refining Preferred, and 
other preferred stocks now yielding from 6% to 

Effect on Common Stocks. 

When it comes to a discussion of the effect of 
increased gold production on the prices of the com- 



EFFECT OF GOLD PRODUCTION 363 

mon stocks of our leading railroads and industrials, 
two other factors must be considered: viz., 

( 1 ) If, owing to abnormal gold production, the 
price of money is to increase, a railroad, w^hich a 
few years ago when interest rates w^ere low, issued 
some one-hundred year bonds at 3-1/2% interest 
— as did the Isew York Central & Hudson Kiver 
Railroad Company — will have a distinct advan- 
tage over competitors, who must continue to borrow 
at high rates. Even now the ISTew York Central 
must pay fully 1% more than it paid when the 
3-1/2% bonds were issued in 1897; and if the 
ideas of the exponents of the '^Gold Theory" are to 
become true, the time may arrive when corpora- 
tions like the Kew York Central must issue 6% 
bonds in order to sell them at par. It therefore 
will be seen that if gold is to continue to depreciate 
in value, the investor should purchase only short 
time securities ; ivhile railroads and industrial cor- 
porations should horrow for the longest time pos- 
sible. 

For instance, assume that a railroad has 
$100,000,000 of 3-1/2% bonds which it issued 
some years ago at par and also has $100,000,000 of 
stock, upon which it now pays 5%. Assume that 
a competitive line, some years hence, must issue 
$100,000,000 of bonds, but owing to the deprecia- 
tion in gold, must issue them as 5-1/2% bonds 
instead of 3-1/2% bonds. If all other conditions 
are the same, and if both roads are now able to pay 
5 % on their stocks, the first mentioned road which 
already funded its debt at 3-1/2 % should in years 



364 BONDS AND STOCKS 

to come be better able to pay 2% more on its 
$100,000,000 of stock than the competitive road 
will be able to pay on its $100,000,000 of stock. 
In other words, if gold continues to depreciate 
abnormally in value, although the stocks of both 
roads are now paying 5%, it is easy to imagine 
that the time will come when the first road with a 
funded debt on a 3-1/2% basis will pay 7%, while 
the second mentioned road with a funded debt on 
a 5-1/2% basis can still pay only 5%. In view of 
this fact, it is the common stocks of our railroads 
luhich will he helped hy this depreciation in gold; 
and such stocks — instead of declining in price as 
in the case of bonds — should increase in price, or 
at least hold their oiun. This latter phrase is added 
because — according to the theory in the foregoing 
paragraph — if this depreciation takes place, the 
7% stocks of the first mentioned road will then be 
selling for only what this 5% stock is selling for 
today, owing to the fact that all interest rates have 
increased correspondingly. In such a case, instead 
of the stock of the first mentioned road selling 
higher some years hence, this will simply hold its 
own ; while the stock of the second mentioned road, 
which has not yet refunded its indebtedness at a 
low rate, will decline in price. 

, (2) 'Not only should the corporations which 
have already refunded their indebtedness at a low 
rate receive an increased income therefrom, but 
they should be alloAved to increase their rates in 
accordance with the increase in everything else. 
If the prices of raw materials, manufactured goods, 



EFFECT OF GOLD PRODUCTION 365 

wages and interest all increase, there is no reason 
why freight rates and passenger rates also should 
not be allowed to increase. As prices and prosper- 
ity increase, there is no reason why railroads should 
not he allowed to share this greater prosperity with 
others, and there is no doubt but what they must be 
to a certain extent. It is believed by some that in- 
creased gold production causes a certain abnormal^ 
speculative atmosphere which takes the appearance 
of general increased prosperity and also increases 
gross earnings, which in turn should still further 
increase the value of corporation common stocks. 
Of course, theoretically, a very large amount — if 
not all of this increase — will be absorbed through 
operating expenses, as more must be paid for mate- 
rials, more for labor, and more for real estate and 
every other item purchased. One cannot beat the 
laws governing this universe, all of which are 
fundamentally based on Xewton's great law: 
^'Action and reaction are equal." 

Therefore, there is little doubt as to whether the 
advantage, which the enthusiastic supporters of the 
Gold Theory imagine, will come to the common 
stocks of our large railroads and other corporations. 
Law is law, and there is no way yet discovered 
whereby it is possible to obtain more than one hun- 
dred cents from one dollar. Although the pur- 
chaser of common stocks may see Ms dividends 
increase if gold depreciates in value, it is hard to 
see why the price of these stocks should materially 
increase, although they should hold up much better 
than certain preferred stocks. In other words, the 



366 BONDS AND STOCKS 

only advantage which a holder of common stocks 
can receive is that he v^ill not be affected adversely 
if gold abnormally increases. 

With certain industrials which have large sup- 
plies of raw materials, such as the United States 
Steel Corporation and some of the fertilizer com- 
panies, this is a different proposition. Eising 
prices for commodities may not interfere with the 
earning power of corporations which sell commod- 
ities, the prices of which are not limited by law. 
In fact, these corporations are, in many cases, 
gainers by this influence which tends to advance 
prices. (It may be added here that railroad com- 
panies which own valuable coal lands, etc. may 
find that in case of a great use in commodities, such 
property may be a great factor in increasing the 
price of their stocks. The railroad company, then, 
may be considered as preeminently a seller of 
transportation and has been so .regarded herein). 
Most corporations, however, whose products are 
subject to regulation by law, such as traction, gab' 
and electric lighting companies, etc., are subject to 
practically the same influences as those whicH 
operate against the prices of railroad stocks. 
Their cost of production advances easily and inevit- 
ably, and the selling price remains fixed, or ad- 
vances with difficulty and under protest. 

Something Else to Think About. 

But what if, instead of gold abnormally increas- 
ing in production, it should abnormally decrease ? 
This certainly is something worth thinking about. 



EFFECT OF GOLD PRODUCTION 367 

Every mine has a bottom just as truly as every 
apple barrel. Thus the clay is coming when the 
gold mine will become exhausted, for certain of the 
best mines are now approaching this point. Of 
course, new discoveries are being made in Alaska, 
Canada and other portions of the world ; but is it 
not as legitimate to assume that fifty years hence 
the production of gold will be abnormally small, as 
that it will be abnormally great? Of course, the 
practical answer to this question, so far as we can 
be interested during our lifetime, depends upon 
whether or not the very low-grade ores can be used. 
As is known, the sea water contains a certain per- 
centage of gold, and there are hundreds of thou- 
sands of acres of gold lands throughout our south- 
ern states that contain about one hundred cents to a 
ton in gold. At the present time, no ore can be 
treated that runs less than about two dollars per 
ton; but if some new method is discovered to ex- 
tract these low-grade ores, then the production of 
gold will suddenly abnormally increase, which will 
be accompanied by an increase in the price of com- 
modities, wages, rents and interest rates. This 
will be accompanied by a decrease in the prices of 
long-term bonds and certain preferred stocks, 
although the prices of railroad stocks may tempo- 
rarily increase, vrhile the prices of certain indus- 
trial shares of corporations not subject to govern- 
ment control and speculative commodities should 
increase. 

On the other hand, if no method is ever dis- 
covered whereby these low-grade ores can be ex- 



368 BONDS AND STOCKS 

tracted at a profit and no further discoveries of 
consequence are made, then our present mines will 
gradually become exhausted and the production of 
gold will become abnormally small and "the reverse 
will happen. In this case, the present holder of 
long-term bonds will have the advantage, over 
everybody else, for wages, commodities interest 
rates, etc. will all decline; while he will have a 
fixed income at a rate much above the market. In 
short, it is entirely possible to imagine that things 
may work around in this unexpected way, and that 
fifty years hence the 'New York Central & Hudson 
River Railroad Company and other roads may be 
able to issue bonds at 2-1/2% interest. In this 
case, the bondholder who now has these roads "tied 
up" at 3-1/2 % for one hundred years will have the 
best part of the bargain. The following points are 
submitted which have been prepared by Mr. Byron 
W. Holt, who has probably made a more exhaustive 
study of this subject than any other person with 
the possible exceptions of Senator Burton of Ohio 
and Professor Irving Fisher, of Yale University. 

1 — Both the output and supply of gold are likely to in- 
crease rapidly for many years. 

2 — Therefore, the value of gold will depreciate as the 
quantity increases. 

3 — This depreciation will be measured by the rise in the 
average price level. 

4 — A rising price level, if long continued, is accompanied 
by rising or high interest rates. 

5 — High interest rates mean lower prices for bonds and all 
other long-time obligations drawing fixed rates of interest, 
dividends, or income. 

6 — Rising prices increase the cost of materials and of 
operation and tend to decrease the ne^ profits of all concerns, 



S'cat 



1875 



1878 



1879 



1880 



t--t 



1883 1884 



1885 



1886 



1887 1 1888 1 1889 1 1890 j 1891 1 1892 1 1893 1 1894 \ 1895 [ 1896 1 1897 1 1898 [1899 j 1900 1 1901 1 1902 |1903 



Production of Gold 1874*1912 

The world's production of gold is here plotted In conjunction with the production of the United 
States and of the Witwatersrand district of South Africa, thus showing that the increase of the last twenty 
years Is general and probably due to Improved methods of production. Commodity prices and interest 
rates will be high unless the world's volume of business grows in proportion to the production of gold. 

As the changes are very slight and complete returns can be obtained only annually, this chart is 
revised only once each year. 

Plotted and published In connection with Babson's Reports on Fundamental Business Conditions 
Compiling Offices: Wellesley Hills, Mass. 




1904 1905 



1906 



1907 



i^ 



1909 



1910 1911 



1912 



1913 



EFFECT OF GOLD PRODUCTION 369 

the prices of whose products or services either cannot be 
advanced at all, or are not free to advance rapidly. 

7 — Rising prices tend to increase the net profits of all con- 
cerns that own their own sources of materials and supplies. 

8 — Rising prices of commodities tend to cause the prices of 
all tangible property to rise. This includes land, mines, 
f(3rests, buildings and improvements. 

9 — Rising prices of commodities and property tend to in- 
crease the value of the securities of corporations holding 
commodities or property. 

10 — Rising prices and cost of living necessitates higher 
money wages, though the rise of wages will follow, at some 
distance, behind the rise of prices. 

11 — As rising prices do not mean increased profits to all 
concerns, many employers will not concede higher wages 
without strikes. 

12 — Rising prices and wages, therefore, mean dwindling 
profits and troublous times in many industries, with com- 
plete ruin as the final goal. 

13 — Because Avages will not rise as fast or as much as 
prices and the cost of living, there will be dissatisfaction and 
unrest among wage and salary earners. 

14 — Rising prices of commodities and property encourage 
speculation in commodities, stocks and real estate and dis- 
courage honest industr5\ 

15 — Thus, rising prices, by diminishing the incomes of 
"safe" investments in "gilt-edge" bonds and stocks and by 
increasing the profits of speculators encourage extravagance, 
recklessness and thriftlessness. 

16 — As rising prices decrease the purchasing power of 
debts, and thus aid debtors at the expense of creditors, they 
discourage saving and thrift. 

17 — Rising prices, then by promoting speculation and ex- 
travaq-ance, increase consumption, especially of luxuries, and 
therefore, stimulate production. 

18 — Rising prices result in what is real prosperity for 
many industries; but what is for a nation as a whole, art- 
ificial or sham prosperity — the result of marking up prices 
rather than increasing production. 

19 — With prices, wages, rates and industries always im- 
perfectly adjusted to the ever depreciating value of gold, and 
with instability and uncertainty throughout the financial 
world, there cannot but be a great shifting around of values 
and of titles to property. 

20 — As this shiftimr is to the advantage of the debtors 

the rich — and to the disadvantage of the creditors — the great 



370 BONDS AND STOa^S 

middle class — it results in rapidly concentrating wealth in 
the hands of a comparatively few. 

21 — For all of these reasons, a prolonged period of rapidly 
rising prices is reasonably certain to become a period of 
unrest, discontent, agitation, strikes, riots, rebellions and 
wars. 

22 — A rapidly depreciating standard of value then, if long 
continued, not only produces most important results in the 
financial, industrial and commercial world, but is likely to 
result in changes of great consequence m the political, social 
and religious world. 

Some of the leading investors believe tliat the 
chances are about even as to whether the gold sup- 
ply is to increase abnormally or whether it is to 
decrease abnormally, or in other words, that the 
conditions may so adjust themselves that the gold 
factor need not be seriously considered at the 
moment. Therefore, the investor had better forget 
all about the ^^Gold Theory" so far as it applies to 
investments and devote his energy to seeing that 
his wages are adjusted in accordance with the cost 
of rents, clothing and foodstuffs. The "Gold 
Theory," as a theory, is absolutely sound; but 
which way it is going to work nobody knows. It 
is perfectly safe to say: "If it is going to rain 
tomorrow, you should be sure to take a raincoat and 
umbrella." This is a sound theory, but what you 
really want to know is whether it is or is not going 
to rain tomorrow : and this nobody knows. 

Edison on the Effects of the Increased 
Gold Production. 

Very few people realize that Thomas A. Edison 
is one of the best informed men in America on the 
production of gold. Edison is known the world 



EFFECT OF GOLD PRODUCTIOX 371 

over as America's greatest inventor, having proba- 
bly done more to make practical use of electricity 
than any other living man. He is, however, a 
much broader man than one simply interested in 
electrical and mechanical investigations; in fact, 
he is wonderfully well informed on almost every 
subject. 

Although during the last few years, he has had 
more time to give to general topics than previously, 
yet it is probably through his chemical research 
work that he has become interested in the ^^Gold 
Theory." He and his great organization in some 
of their experiments have come very close to dis- 
covering some process whereby gold may be profit- 
ably extracted from common clay. The tremen- 
dous importance of such a discovery has actually 
frightened him. 

Few men give so little thought and have so slight 
a desire for money as has Mr. Edison, and there- 
fore it was not the possibility of making gold for 
himself that thrilled him while carrvins: on these 
experiments ; but the fear that, should his experi- 
ments be successful, he would shake the entire com- 
mercial, industrial and investment world to its very 
foundations. Certainly such a discovery would 
cause a greater world panic or industrial and social 
revolution than history has ever witnessed. 

But this is not all. Mr. Edison's experiments 
have not been limited to the walls of his laboratory 
at Orange, X. J. ; he has spent large sums of money 
in the South on practical and extensive operations. 
As is well known, in a certain section of the coun- 



372 BONDS AND STOCKS 

try there is a kind of clay which contains almost 
enough gold to make its workings profitable. There 
are but few if any which at the present time 
are being worked, wherein there is less than about 
three dollars to the ton. The most important great 
beds of clay run about a dollar to the ton, and when 
some process is discovered which will enable these 
dollar clays to be profitably operated, something 
vital will happen to our ^'Gold Standard." 

Mr. Edison states that under the city of Phil- 
adelphia is a stretch of clay forty miles long which 
assayed thirty cents to the ton, and that in this 
little belt alone is more gold than all the free gold 
today in the vaults of the United States Treasury. 
In discussing these and other deposits, he spoke of 
the very limited use of gold in the arts and man- 
ufactures, and said, "Doesn't it seem strange for 
the entire financial systems of the world's greatest 
countries to be founded on a metal, for which the 
only use we have is to gild picture frames and fill 
teeth?" 

Of course, no discovery has yet been made to use 
these very low-grade clays; but Mr. Edison stated 
that it is not only entirely possible but very proba- 
ble that some such discovery will be made within a 
reasonably short time. Experiments, which he and 
others are making, are bringing such discoveries 
nearer every day and even tomorrow some chemical 
process may be found to successfully bring about 
this most wonderful and far-reaching result. AYhen 
it is considered that this clay exists in very large 
quantities throughou.t the entire United States, and 



EFFECT OF GOLD PRODUCTION 373 

that even the sea water is said to contain five cents 
worth of gold to every cubic yard, the great im- 
portance of the work is self-evident. 

Xow a word as to the ^^Gold Theory." At the 
present time, the monetary systems of the world are 
based on the fact that the Bank of England mnst, 
by law, be ready to purchase all gold of standard 
fineness at 77 shillings 9 pence per troy oimce, and 
that any person can bring gold to our United States 
Treasury and receive gold certificates therefor on a 
similar basis. The result of this is that anyone 
having a gold mine is in a different position from 
almost anyone else in the world, as his product is 
not subject to supply and demand in the ordinary 
sense, but he can take it directly to the Bank of 
England or to the United States Treasury and re- 
ceive money for it at this fixed rate, which money 
he can use for the purchase of goods at any store. 

It will be seen, therefore, that if some man 
should discover an almost unlimited amount of 
gold, he would not bring down the price of that 
gold in the terms of money, the same as if he dis- 
covered any other commodity; but he could go to 
the Bank of England or to the United States Treas- 
ury and obtain an unlimited supply of ffold certifi- 
cates in exchange. E'ow it can be readily seen that 
although some man should have an unlimited sup- 
ply of gold and could obtain an unlimited supply of 
bills from the Bank of England or the United 
States government, yet as soon as the people, who 
own real commodities such as wheat, iron and mer- 
chandise become aware of this fact, they would not 



374 BONDS AND STOCKS 

sell him their real commodities at prices at which 
they held them before his discovery, but would im- 
mediately advance their prices. In other words, the 
more money he might manufacture, the less people 
^ would care for it and consequently, they would 
want more money for the real commodities which 
they give him in exchange. A ton of iron, a bale 
of cotton, or a bushel of wheat is much more use- 
ful, intrinsically, than a thousand dollars in bills, 
or even the actual gold which these bills represent. 

Of course, this is a radical illustration ; but Mr. 
Edison insists that a process similar in principle is 
now slowly going on ; that is, that gold is actually 
becoming more common, that the miners are rush- 
ing it to the United States Mine too rapidly, and 
that the merchants to whom they offer it are un- 
consciously feeling that it is depreciating in value 
and consequently are raising the prices on their 
goods to correspond. Of course this is hard on 
those of us Avho have not gold mines and are de- 
pendent on fixed salaries or on the income from 
long term bonds ; but it is impossible for the store- 
keeper to have one price for the miner and another 
for the wage earner; therefore, we must pay these 
increased prices. 

This great increase in the gold production about 
which Mr. Edison talks, is well illustrated in the 
annexed chart which shows by a heavy solid line 
the world's production of gold; by a heavy dotted 
line, the production of gold in the United States 
and by a light dotted line, the production of gold in 
the Rand Mines. It will be seen that the total 



EFFECT OF GOLD PRODUCTION 375 

yearly production has increased from 5/749,306 
fine ounces in 1890 to over 20,000,000 in 1911 
which is having three effects, viz. : 

(1) This increased production is causing a gen- 
eral increase in prices. 

(2) When this increased production increases 
too rapidly, it is like giving a child too much 
money to spend. It causes a certain recklessness 
among the wealthy and great discontent among the 
poor, spreading seed for a financial and social revo- 
lution, an effect which is the real evil of the in- 
creased production of gold. 

(3) The last and most interesting result is on 
the investor and the prices of stocks and bonds ; and 
this is best described by Mr. Edison's own words, 
which are submitted verbatim, Mr. Edison having 
written these conclusions after very careful thought. 

^^All the great government, state, municipal and 
railroad loans of the w^orld are represented by long 
term bonds. These bonds are payable in a certain 
commodity of a certain weight and degree of puri- 
ty. This commodity has very little intrinsic value ; 
little is used in the arts, it is kept in vaults and 
shuttlecocked between financial centers, melted, 
coined and remelted. It is a mobile commodity 
which is accumulative; it has been accumulating 
since the dawn of history. Its only value resides 
in the brain of man. All men agree to accept it 
as a measure ; nearly all other commodities are 
more desirable to meet physical wants which will 
never change, but gold is a commodity of the imag- 
ination. 



376 BONDS AND STOCKS 

"Modern methods in mining, modern chemical 
discoveries, increased intelligence and scientific 
business methods have led and is still leading to the 
production in the last fifteen years of an immense 
amount of gold. Every year, the average will in- 
crease at a greater ratio, and when science has 
advanced a little more, the gigantic and absolutely 
inexhaustible deposits within the lov/-grade clays of 
gold countries will be worked at a high profit. The 
world's business has increased so enormously that 
the increased production of gold has heretofore 
fitted in; but this point has been passed. Gold 
production will hereafter increase faster than busi- 
ness. 

"The mass of this commodity will become a 
burden. Thinking masters of capital will hesitate 
to loan money to be repaid at some long period in 
the future v/ith this commodity. If they loan at 
all and 'place themselves at the mercy of a steam, 
shovel and chemical luorks, the calculated deteriora- 
tion as to its value over the loan period will have to 
be paid by the borrower at an increased rate of in- 
terest. Railroads are hoping. for the return of a 
period when they can sell low interest bearing 
bonds. In my opinion that period will never come 
with the loan payable in gold. The day of 3-1/2% 
for the best borrowers has passed never to return, 
and long term bonds will not be so desirable as they 
have been in the past. The rapid advance in intel- 
ligence and education in the science of money and 
values is bound to disturb the blind and orthodox 
belief in the value of gold as a commodity. More 



EFFFXT OF GOLD PRODUCTION 377 

and more sliall we see that it is safer to own the 
stocks of say a railroad having no bonds, than the 
bonds of a railroad because the stock ownership 
represents good property, something intrinsically 
valuable ; whereas with the bonds, speculators could 
step in and pay them off with a depreciated com- 
modity. 

''To my mind, merchants' notes tahen for goods 
sold or advances on goods in transit are the highest 
securities; next, short term state securities with the 
taxing power behind, and short-time real estate 
mortgages/' 

Considering that unlike many professional econ- 
omists and academic students, Mr. Edison is 
thoroughly familiar with the mechanical and chem- 
ical side of this great problem as well as the theoret- 
ical, this is the most astounding statement on the 
^^Gold Theory" that has ever come from the pen of 
any living man and is certainly worthy of the most 
careful consideration by every banker, merchant 
and investor on this civilized globe. 



CHAPTER XXII. ^ 

INVESTING IN NEW PROPOSITIONS. 

A SHORT time ago, a well-known civil en- 
gineer asked advice relative to some invest- 
ments which he holds. He stated that his 
investments had been very unfortunate, and 
although his professional income had been large for 
a number of years, he had succeeded in saving only 
a comparatively small amount of money. This 
man is supposed to have splendid judgment and is 
himself consulted on very important problemSj but 
his list of holdings consisted mostly of stocks of 
mining companies, oil companies, land development 
companies, together with "securities" of corpora- 
tions organized to promote new patents which were 
promised to revolutionize the world. In short, he 
had "invested" during the past ten years exclusive- 
ly in new companies and untried propositions of 
which he really had very little knowledge. Truly, 
he could say that "investing is only one form of 
spending." 

Xow, of course, it is easy to advise a man to in- 
vest only in high-grade, seasoned securities, and 
when such securities can be purchased to yield five 
per cent or more, they are the best investments. 
On the other hand, if everyone immediately fol- 
lowed this advice, these good securities would soon 
increase to such abnormally high prices that their 
yield would be very unattractive. Moreover, it 
would be impossible for legitimate, new enterprises 



INTESTING IN NEW PROPOSITIONS 379 

to obtain new money for important and useful 
development work. For this reason it is both un- 
wise and selfish to always advise a man never to 
invest in new enterprises, although one might so 
advise a man at the times when high-grade, sea- 
soned securities may be purchased to yield a satis- 
factory rate of income. In fact, one of the most 
remarkable features which becomes evident to 
students of finance is that the rate of interest, if 
allowed to work naturally, has the same eifect in 
regulating the flow of money into new enterprises 
as the "float" has in regulating the flow of gasolene 
into the cylinder of a gas engine. 

Tests of New Enterprises. 

If high-grade, standard securities can be pur- 
chased to yield approximately five per cent, this 
shows that the country is in no need of new develop- 
ments, and that one had better loan his money to 
concerns now in successful operation. On the 
other hand, if these high-grade, seasoned securities 
are selling at prices causing the yield to be abnor- 
mally low, and said high prices are not due to man- 
ipulated speculation, this shows that sufficient cap- 
ital is not being appropriated for tbf! development 
of new enterprises and that an investor is justified 
in looking up new fields of investments. * 

The Character of the Promoters. 

'^Mien discussing a leading manual on railroad 
and corporation securities, a publication which 
gives investors the details relative to corporations 



380 BONDS AND STOCKS 

whose securities have been offered to the pablic, 
including capitalization, earnings, property owned, 
and various other matter, a banker once said : ^'The 
publication is a very valuable work; but it sorely 
needs a supplement, fully as large as the manual 
itself, which will tell me about the character of the 
men operating said corporations. In other words, 
when asked to purchase the note of an industrial 
corporation, although I like to have a statement of 
said company, yet I am much more interested in 
knowing about the personal life of the men who 
operate it. When looking up a certain corporation, 
if I could see a photograph and read an honest 
biography of each of the officers and members of 
the executive committee of said corporation, I 
could immediately make up my mind whether or 
not I wished to buy its paper." 

He continued by saying, ^^I Avant to know in 
what town or city they were born and who their 
ancestors were. I want to know where they went 
to school ; whether they worked their w^ay through 
and appreciated all their opportunities, or whether 
they simply got through ^by the skin of their teeth' 
and wasted most of their time in social life. I 
would like to knoAv in what line of work they have 
been ; how many different positions they have occu- 
pied ; how they have made their money ; where they 
live today ; of what their family consists ; whether 
they take an active interest in church work; who 
their associates are, and how they are regarded by 
their neighbors and townspeople." 

In short, this well-known man emphasized 



INVESTING IN NEW PROPOSITIONS 381 

Strongly the necessity of loaning money to and pur- 
chasing securities from only those corporations 
which are operated by men of integrity, and whose 
business relations record straight-forwardness, per- 
severance and true success. Therefore, the first 
step to apply to any new proposition which is 
offered for investment is the question, ''Are the 
promoters clean, honest menf 

If they are clean, straight-forward men, the 
proposition is worthy of consideration, and the 
second test may be applied; but if otherwise, the 
proposition should be let alone. Of course, men 
who are not straight-forward apparently succeed, 
and men who have not clean, personal records ap- 
parently make money ; but as a matter of principle, 
a self-respecting man should take a firm stand to be 
in business only with men of his class ; and certain- 
ly when one buys stock in a company, he is practi- 
cally entering into partnership with the other 
stockholders. 

Moreover, there are enough good propositions 
about, and there are enough opportunities where 
one can invest his money so that he can afford to 
discriminate and eliminate mthout consideration 
all propositions which are not operated by men who 
are his equals, and refuse to consider securities 
which are offered for sale by men who do not stand 
for integrity and righteousness. 

Experience is Important. 

Not only should men he upright; hut they should 
also have had experience in the line of husiness 



382 BONDS AND STOCKS 

which they are promoting. There is a !N"ew Eng- 
land man who is a promoter of a company for 
the manufacture of automobile trucks. This man 
is an honest, intelligent fellow ; but such money as 
he has, he ^^made through the wise choice of a 
father" and has really earned but little himself. 
Today he is some fifty years old, is a prominent 
citizen in the small to^vn, is respected by his 
neighbors and loved by his friends ; but thus far he 
has done nothing but cut off coupons, with the 
exception of holding unimportant positions in com- 
panies in which his father had large interests. 

This man has always desired to go into business 
of some kind, and he is sure that the ^^'coming busi- 
ness" is to be in automobile trucks; consequently 
he has organized a company to manufacture and 
sell such trucks. 'Not only is this man honest in 
his intentions, but he is putting considerable of his 
own money into the business and would put more 
in were it not for his sensible Yankee wife who 
shrewdly insists that the remainder of the money 
be raised by selling stock. Now, of course, this 
company may be very successful and he may make 
a fortune for himself and friends ; but the chances 
are very much against it. !Not only is he handi- 
capped by the established concerns already in the 
business, which are now supplying more trucks 
than are demanded, but he has had no experience 
in the automobile business, and the only men he 
has employed as his advisors are men whom the 
established manufacturers find it not worth their 
while to retain. Therefore, there is no doubt in 



INVESTIXG IN NEW PROPOSITIONS 383 

mj mind but that this man will lose considerable of 
his own money as well as that of his friends who 
are buying the stock in his company, and there will 
be one more name to add to a list of over thirty 
thousand "worthless concerns, the securities of 
which have been offered for sale to small investors 
throughout the country. 

Judgment. 

But not only is it necessary to purchase stock of 
companies whose promoters are men of experience 
in their respective lines ^ hut also these companies 
should he operated hy men of good judgment. 
There are lots of men, who are splendid mechanics, 
who have an extra good education, and who have 
worked for years in the manufacture of some art- 
icle, yet who have had little experience in financial 
matters, who are literally imable to operate a large 
company and especially unable to sell its output. 
There are two distinct departments to all industrial 
concerns; namely, the manufacturing end and the 
selling end. Many companies are promoted by men 
of integrity who have had good experience along 
the mechanical lines of the business, but are utterly 
unable to sell goods after they are manufactured. 
Today it is the man who has the ability to dispose 
of the output who controls the situation m most 
industries. 

This applies not only to manufacturing com- 
panies, but also to certain industries which are 
absolutely dependent on the producing end, such as 
coal companies, and even railroad companies. As 



384 BONDS AND STOCKS 

an example of this class, tliere is a coal company 
wliose preferred stock was purchased bj very able 
'Ne\Y England people as a choice investment and 
which is now paying no dividend whatever and sell- 
ing at a very low price, while the first mortgage ^ve 
per cent bonds are selling in the vicinity of seventy- 
five. This company has splendid coal properties 
and the technical end of the business is being cared 
for in a most economical and scientific manner; 
but the selling end lacks organization because the 
men who promoted it, although good mining en- 
gineers and good bankers, know nothing about the 
coal business as a business, and are unable to dis- 
tribute their output at a profit. It is therefore 
evident that, when applying this second test, name- 
ly, ''Are the men experienced in the line of worhf 
we should consider both technical experience and 
native business ability. 

Physical Conditions. 

As a fourth test, one should ask the question, "Are 
the physical conditions, upon which the new com- 
pany is dependent, satisfactory ?" Many new prop- 
ositions which have passed successfully the first 
test, fail on this. For instance, it would be useless 
to build a subAvay on the plains of Kansas, or an 
artificial ice plant in Quebec, or attempt to sell 
furs in cities of the torrid zone ; yet many promo- 
tions are of similar aspect. Among some of these 
is a coal company in a ISTew England state where 
coal has never been found ; a copper company in a 
part of the country where geologists claim it is 



rNTVESTIXG IN NEW PROPOSITIONb 385 

impossible for copper to be deposited; a new gas 
company in a city with wonderful undeveloped 
water power, and of a railroad company between 
two cities which now have a most excellent deep- 
water steamship connection. All of these com- 
panies are being promoted by honest men and men 
who have been trained in their respective lines of 
business; but for some reason or other, they have 
certainly "gone off a tangent" regarding these pro- 
motions. In some cases they are promoting the 
company as a matter of pride or to develop their 
home town. Sometimes there are other reasons for 
their interest in these propositions which are bound 
to be unprofitable ; while in one the stock is appar- 
ently being sold simply with the idea of making a 
profit on the stock without any expectation of de- 
veloping the property. 

The most pitiful case of all is that of a retired 
clergyman who is selling the stock of a plantation 
on one of the islands which the United States 
acquired during the Spanish War. This man is 
an absolutely honest man and has been a preacher 
in a city not far from Xew York for a number of 
years. On talking with a man who had been in- 
terviewed, it was found that this well-kno^\^ 
preacher had broken down in health and decided to 
give up the ministry as he needed out-of-door work, 
and having a persuasive manner, he was urged to 
sell stocks in these new prom^otion schemes. Be- 
lieving that the brokers advertising this stock are 
honest, he is peddling it among his former friends, 
knowing nothing about finance, nothing about busi- 



386 BONDS AND STOCKS 

ness, nothing about that part of the country in 
which the property is located and nothing about the 
character of the brokers. Although this preacher 
deserves sympathy, especially as his intentions are 
the very best, yet he is making a great mistake in 
selling these stocks, and unfortunate are the people 
who purchase them from him. In fact, when such 
a man comes to sell you stocks, instead of buying 
the stocks, ask what his commission would be and 
give him a check for this commission if you wish to 
help him ; but do not buy the stocks. 

Stick to Your Own Game. 

In addition to making sure that the promoters 
are acquainted with the character of the business 
which they are promoting, the investor should also, 
when buying securities in new propositions, confine 
himself to lines of business with which he is 
acquainted. Therefore, the fifth test to apply is 
to ask the question : '^^Am I thoroughly acquainted 
with this line of business upon the success of which 
my investment depends f 

When a man invests in high-grade, seasoned secu- 
rities, he is free to purchase securities of railroad 
corporations, public utility corporations and in- 
dustrial companies, although he has no personal ac- 
quaintance with the line of business in which he is 
investing ; but the same rule should not be followed 
when investing in speculative or unseasoned secur- 
ities. For instance^ let us assume that a man is a 
coal dealer in a small western town and that by 
prudence and hard work, he has saved $30,000 or 



INVESTING IN NEW PROPOSITIONS 387 

more, all of which is invested in high-grade securi- 
ties. 'Nov^, it is not necessary that this man be 
acquainted with the operation of railroads or steel 
companies in order to have this money safely in- 
vested in bonds of the Pennsylvania Railroad Com- 
pany, the Kew York Central & Hudson Eiver, the 
Illinois Central, or the Southern Pacific, or in the 
preferred stocks of such corporations as the Ameri- 
can Sugar & Refining Company, the Virginia- 
Carolina Chemical Company, or the United States 
Steel Corporation. These are established enter- 
prises run by men who thoroughly understand their 
business, and although the man's personal business 
training has been confined wholly to buying and 
selling coal in this small western town, he is fully 
justified in having his money invested in the secur- 
ities of these and similar corporations. 

We will now assume, however, that this man is 
not fully satisfied with the average yield of about 
five per cent which he receives from his present 
investments and desires to ^^take a flyer," or in 
other words, to invest $2,500 in the stock of some 
new enterprises with the hope of doubling his 
money. He has read about the development of oil 
companies, gold m.ining companies, wireless tele- 
graph companies, cotton picking companies, and a 
host of other new enterprises ; so he is very anxious 
to buy a little stock in some of these new proposi- 
tions and seeks advice. 

Cases of this kind should invariably be treated 
as follows : One's first inclination is to advise such 
men to let all these new propositions alone and con- 



388 BONDS AND STOCKS 

tinue to invest simply in high-grade, seasoned 
securities; but such advice would probably not be 
heeded. Therefore the advice should be ''Look 
for a proposition which passes the above-mentioned 
tests and lohich is based on a familiar line of busi- 
ness/' 'NoWf this advice is fundamentally sound, 
and the great value of such a test is exceedingly 
evident when the investor invariably replies, ^'Your 
advice may be very good, but I know a great deal 
about the coal business and it is not a very satis- 
factory character of business. I have no money 
invested other than in the coal which I have on 
hand, and I do not wish to get tied up in any coal 
mining investments." Whatever the business in 
which a man is engaged, he seems to dread invest- 
ing money therein and invariably desires to invest 
in something about which he has no knowledge! 
Scores of illustrations could be given on this point 
which show very exclusively why a man should 
'Hahe a flyer' only in some line of business with 
which he is thoroughly acquainted. 

If you are in the steel business, confine your 
speculation to steel stocks ; if you are in the lumber 
business, confine your speculation to stocks like 
those of the International Paper Company, the 
Union Bag & Paper Company and similar proposi- 
tions ; if you are in the boot and shoe business, con- 
fine your speculation to stocks like the Central 
Leather, American Hide & Leather, etc. ; if you are 
in the dry goods business confine your speculation 
to the securities of the United Dry Goods Com- 
pany, The American Woolen Company, or other 



INVESTING IN NEW PROPOSITIONS 389 

similar textile companies. If yoii are in the 
paint bnsiness, look up ^Rational Lead Common 
and Preferred ; if you are in the grocery business, 
study the isTational Biscuit, American Sugar, 
Standard Oil, and a host of others of a similar 
nature ; and so on down the list. 

To sum up, it will be seen that w^hen one invests 
in a new proposition, great care should be taken to 
apply five tests by asking these five questions, 
viz. : 

( 1 ) Are the promoters clean, upright men ? 

(2) Are the promoters experienced in the line 
of work which the new company is to undertake ? 

(3) Have the promoters good business judg- 
ment? 

(4) Are the physical conditions and opportun- 
ities surrounding the new promotion reasonable ? 

(5) Is it a line of business with which you 
(the investor) are fully familiar ? 

Of course, there are other tests which also are 
important and which must be complied with to 
ensure success ; but these cannot be considered here. 
It can be stated with certainty, however, that any 
new proposition which fails to fulfill these five 
tests should be passed by. 



CHAPTER XXIII. 

COITCLUSION, 

I IN" tlie previous cliapters tlie writer has con- 
scientiously striven to give the reader some 
good advice relative to bank accounts and 
establishing for himself a credit, together with 
specific descriptions of different kinds of corpora- 
tions and different groups of securities. Various 
other subjects which trouble the investor have also 
been discussed and the writer has endeavored in 
all cases to treat the subject justly, giving both 
sides of the question. Thus, if the reader has 
absorbed all that has gone before, he should have 
in his mind a clear idea of the different kinds and 
groups of securities and the various questions and 
terms involved therewith. On the other hand, 
owing to this endeavor to be fair to all interests, 
the reader may still have no definite ideas as to 
how or when to invest. Hence, in order to be of 
real help to investors, the writer will now "remove 
the brakes" and briefly, but frankly, state his per- 
sonal opinion regarding investments. 

Three Different Stock Market Movements. 

In Chapter III of this book will be found a 
description of three classes of investors which are 
grouped according to the different kinds of stock 
market movements by which they endeavor to 
profit. In the first place there are the daily fluc- 
tuations of which the average trader endeavors to 
take advantage. These fluctuations may be com- 



CONCLUSION 391 

pared to the ripples on the waters of a bay. Thej 
cannot be foretold in any way, and they bear no 
relation to the intrinsic value of the prospective 
properties or to conditions in general. Any man 
who endeavors to make a profit from these move- 
ments is, in my opinion, simply a gambler. 

Secondly, there are the broad breaks and rallies 
of from five to ten points, extending over a few 
weeks and caused by the market's becoming over- 
bought or oversold. These broader movements 
may be compared to the waves caused by the winds 
blowing over the waters of a bay. How the winds 
are to blow no one can tell ; but knowing how they 
are blowing, it is comparatively easy to forecast 
whether the waters will be rough or smooth. If 
professional traders would let the market alone, 
the tide would slowly and regularly advance or 
recede without these waves, changing in accordance 
with fundamental conditions; but, owing to their 
impatience and avariciousness, these operators are 
continually either pushing the natural movement 
too far, or else retarding it. If the tendency of 
the market is thought to be downward, all these 
operators become bearish and sell stocks short until 
the market becomes "oversold" and is lower than 
conditions warrant. As soon as it occurs to the 
operators that they have done this, they all change 
their position and begin to buy, continuing until 
the market becomes "overbought," or higher than 
conditions warrant. The market, therefore, is 
very seldom at its logical point based on funda- 
mental conditions; but is almost always above or 



392 BONDS AND STOCKS 

below this point, based upon these technical condi- 
tions. 

As to what these operators are to do, it is impos- 
sible for any one — even themselves — to foretell ; 
bnt from a painstaking and systematic study of the 
tape it is often possible to tell what these operators 
are trying to do, and thus it is often possible to 
intelligently guess whether a break or a rally is 
next in order; but at best it can be only a guess. 
Of course I do not advise any one to study the 
market's technical condition for the purpose of 
trading in these movements ; but to those who are 
bound to trade, I strongly recommend that they 
fortify themselves by a study of these movements 
and the technical conditions causing them. 

Thirdly, there are the long swings extending 
over one or more jears, caused by corresponding 
changes in fundamental conditions. These long 
swings may be compared to the movements of the 
tide. The ripples cannot be foretold in any way ; 
the wave movements can only be guessed at; but 
the tide movements can be foretold with absolute 
accuracy. In the same way, students of funda- 
mental conditions can tell whether the market is at 
high or low tide, or whether the tide is going out or 
coming in. 

Study Financial Cycles. 

All financial and industrial history has been, 
divided into distinct cycles, and each cycle has 
consisted of four distinct periods of from two to 
four years. There is the period of business pros- 



COXCLUSIOX 393 

perity, during -wliicli the insiders liquidate and 
stocks decline in price; the period of business 
decline, during which stocks drag on the bottom; 
the period of business depression, when the in- 
siders are accumulating and stocks are increasing 
in price ; and the period of business improvement, 
at the last end of which stocks reach abnormally 
high prices. Moreover, by a systematic and 
thorough study of both business and investment 
conditions, with their relations to each other, it 
should be possible to tell with exactness in which 
of these four periods we are at any given time, 
and to estimate fairly closely when a change may 
be expected. 

Since it is thus possible to anticipate these long 
swings, referred to as the third movement, those 
Avith money and the courage of their convictions 
are enabled to make large fortunes. Moreover, 
unlike almost any other form of speculation, such 
men as do take advantage of these movements are 
performing a distinct service to their country by 
helping to steady conditions. In fact, every addi- 
tional investor who henceforth endeavors to profit 
by these long swings causes the future periods of 
depression to be less severe and the future periods 
of prosperity to be less reckless. 

In view of the above, two statements should be 
self-evident. The first one is this: There is no 
sure way of making money in day-to-day specula- 
tion, such as is indulged in by the ordinary trader. 
iRinety-eight per cent of such traders come to grief, 
losing not only their money, but also their health. 



394 BONDS AND STOCKS 

reputation, and what is worst of all, tlieir courage 
and self-respect. The game is absolutely ^^rigged'' 
against them, as the powers that be own all the 
paraphernalia and apparatus, and are subject to 
no laws or regulations. At Monte Carlo one plays 
simply against luck, and with the exception of 
about two and a half per cent in favor of the bank, 
the player has an equal chance w4th the bank to 
win, which is not true when he is playing against 
Wall Street. I^ot only are the commissions 
against the speculator — so that if he should win 
one-half of the time he would still be out his com- 
missions — but almost everything is "rigged" to 
beat him. 

Don't Follow the Crowd. 

Most market letters urge the public to buy when 
they should sell, and to sell when they should buy. 
The banks lower their money rates and make it 
easy for people to purchase when stocks really 
should be sold; and, conversely, they call loans 
and unintentionally do all that is possible to pre- 
vent the public from purchasing when stocks are 
low. Corporations raise their dividends and pub- 
lish splendid reports, making their stocks look 
attractive when they are already too high, and 
they reduce the dividends and show poor earnings 
when the stocks are really an attractive and safe 
investment ; and so it is all the way down the line. 
Banks, corporations, leading men, and even many 
of the brokers themselves, are all consciously or 
unconsciously combined to get the public in wrong. 



CONCLUSION 395 

Consequentlv, only about two per cent of the 
traders who enter Wall Street ever succeed in beat- 
ing this game, though even a larger percentage of 
those who plav at Monte Carlo beat the bank there. 

Of course, if one kncAV that the Wall Street 
organization would invariably give the wrong 
advice, one could — if he had extraordinary self- 
control and independence — beat the game by 
always doing exactly the opposite of what some of 
the news sheets, banks, corporation officials and 
brokers generally advise ; but this also is an impos- 
sibility, as these interests sometimes advise cor- 
rectly for the very purpose of still further bewil- 
dering investors and the public generally. There- 
fore, the first point that I wish to impress upon the 
reader is that only about two per cent of the spec- 
ulators and room traders ever succeed in retiring 
from Wall Street with any profit, and that the 
majority of this small percentage do it largely 
through luck. 

The second statement that I wish to emphasize 
is as follows: Although the ordinary speculator 
has a very small chance of profit, and although it 
is almost an impossibility to make money in stocks 
along the lines ordinarily practised, yet there is 
one method by which it may be done. I refer to 
the method of taking advantage of the long swings, 
extending over periods of from one to four years, 
which is possible by a systematic study of funda- 
mental conditions. 

As to what the stock market is to do today or 
tomorrow, or even next week, or possibly next 



396 BONDS AND STOCKS 

month, no one knows, and only those fully 
acquainted with the market's technical conditions 
can make an intelligent guess. Outside of about 
half a dozen interests in Wall Street, all the rest 
of those who play the short swing game are simply 
tools. These six are well known to all and obtain 
their power simply through their intimate connec- 
tions with the press, the corporations and the 
brokers. Moreover, although these men may have 
their places taken by others, yet their number will 
never be much greater; for, as the circle extends, 
they begin to endeavor to beat one another, which 
keeps the number down. So one cannot reason- 
ably expect to be one of these. 

Be a Big Man. 

There is, however, another and much larger 
circle of men who represent Wall Street in the 
popular mind and are continually making and 
retaining great fortunes. These men, however, 
are not traders and speculators, as are the first 
mentioned six, although the public does not recog- 
nize the difference. The operations of these bigger 
men are based wholly on fundamental conditions 
and long swings. AVhen stocks are cheap and they 
consider that fundamental conditions are becoming 
sounder each week, they begin and continue to 
accumulate so long as fundamental conditions con- 
tinue to improve. This period usually lasts for 
about eighteen months, although they may do 
eighty per cent of' their buying during the first 
few months of the period, when the press, the 



CONCLUSION 397 

banks and the corporation officials all seem pessi- 
mistic and the public is selling. 

At the end of this period, and npon the first sign 
of real prosperity, these men begin to sell, although 
many of them continue to talk optimistically so 
that the public will buy. In other words, the dis- 
tributing process commences, lasting for one or 
more years, during which time the leaders are all 
talking optimistically, the banks are loaning money 
at low rates, and the corporations are raising their 
dividends. ISTevertheless, fundamental conditions 
are no longer improving, and these men who study 
fundamental rather than surface conditions are 
rapidly selling all of their stocks ; in fact, even the 
money received from the sale of these stocks is 
loaned on the Street to enable the public to buy 
stocks more easily. 

Then, when the public has absorbed all of the 
stocks possible and surface conditions are so bright 
that the ordinary speculator is anticipating no 
trouble — although fundamental conditions are, of 
course, unsatisfactory — the word is passed around 
to ^^pull the plug." Stocks then begin to tumble 
and almost every one suddenly becomes pessimistic, 
banks begin to call loans, corporations reduce divi- 
dends and evervthins; is done to force the sale of 
stocks and cause low quotations. This method of 
depressing the market is continued for one or 
more years until fundamental conditions begin to 
improve, when the accumulating process above 
mentioned is again commenced, although business, 



398 BONDS AND STOCKS 

SO far as surface conditions show, is still very much 
depressed. 

In short, these men, constantly studying funda- 
mental conditions, enter the market once in every 
few years to buy or sell according to what these 
fundamental conditions indicate. After purchas- 
ing stocks they hold them for a year or so, selling 
out when the public begins to buy, and loaning 
money to the public for a year or more thereafter 
to make said purchasing easier. When they have 
sold all of their previous holdings and also are 
heavily short of the market — while banks, mer- 
chants and investors are overextended and funda- 
mental conditions are becoming unsound — they 
suddenly change their attitude, begin to talk pessi- 
mistically and do all they can to depress stocks, as 
above suggested, preparatory to another period of 
accumulation. 

As to what the marhet does from day to day or 
from month to month, these men do not care. 
They do not trade as do ninety-nine per cent of the 
speculators, hut rather play simply for the long 
swings. Moreover, although I strongly oppose 
many of the methods that some of these men em- 
ploy, yet I believe that the ultimate result of their 
studies is good for the country, hy tending to 
steady conditions as well as being profitable to 
themselves. 

Of course, this means confining all of one's buy- 
ing to perhaps one month in two or more years and 
holding said stocks for a while ; confining all one's 
selling to perhaps a month, and then buying only 



COXCLUSIOX 399 

commercial paper for a while. Bj so doing, how- 
ever, one may eventually accumulate a great for- 
tune without much risk, especially if he will con- 
fine his investments to high-grade standard securi- 
ties. Xearly all of the honest great fortunes of 
this country have been made by a study of funda- 
mental conditions, by independent work along the 
lines above mentioned. Moreover, it is only by 
studying fundamental conditions that one can 
align himself with these large interests — ^^vhich do 
not trade from day to day or from month to month 
— and make money as they do. 

How to Study Fundamental Conditions. 

Various charts and tables have been prepared by 
different individuals in order to enable the investor 
intelligently to take advantage of these long 
swings. With the exception of the Area Charts 
so-called, all of this work either has ignored one of 
the two factors (time or intensity) or else has not 
properly considered the changed conditions due to 
a country's growth or decline. Hence, much of 
this work has not only failed properly to register 
present conditions, but has absolutely failed to aid 
the investor in forecasting future conditions. 
These criticisms, however, do not apply to the Area 
Theory, which is graphically shoT\Ti by the annexed 
chart, and which theory will now be explained in 
detail. 

Tlie Composite Curve Measuring Temporary 
Changes: This outline of the black area (which 
henceforth will be referred to as the "curve") is 



400 BONDS AND STOCKS 

determined by reducing to common index num- 
bers and by combining the latest figures on various 
business barometers such as: — bank clearings, 
money rates, new building, railroad earnings, pol- 
itics, crops, etc. The advantages and disadvan- 
tages of using such a composite plot should be self- 
evident. At first thought one concludes that by 
omitting or including certain subjects and by using 
different systems of weighting that such composite 
index numbers can be made to show almost any- 
thing desired. But, as students of averages will 
know, such is not the case. The writer has at his 
offices in Wellesley, Mass., a great number of these 
composite plots made up in different ways with 
different subjects, and the similarity of them all is 
most wonderful. Consequently, all admit that this 
curve records or measures the temporary changes 
in business conditions. Moreover, complete 
details as to how it is made up will gladly be 
mailed gratis to any reader on request. 

The altitude of the area represents the intensity 
of the business movement, while the horizontal 
length of the area represents its duration. On 
account of this fact, a diagnosis of an area plot 
and a consideration of the area's shape aid one in 
determining how long it will be before a change 
in conditions may be expected. If an area is being 
developed above the normal line, and it is believed 
that the next economic movement will be below 
said line, it is important for the business man to 
know^ when the change in conditions may be 
expected. The statistician bases his conclusions 



COXCLUSIO:^T 401 

, as to duration of tlie various periods upon tlie 
shape and size of the areas. If an area is one of 
considerable altitude, the change maj be expected 
to take place very much sooner than if the altitude 
were not so large ; while, on the other hand, shallow 
areas are likely to continue for some time. 

The X — Y Line Measuring the Trend: If such 
variables as politics and crops were constant and 
there were no disturbing natural forces such as 
great earthquakes and floods, no adjustment or 
correction need be made ; but the X — Y line could 
thus be considered as fixed. These micertain 
forces should be considered, and the method by 
which this is accomplished is one of the salient 
features of the Area Theory. This correction, 
based on bank clearings, representing the nation's 
net growth, comes through the location of the 
X — Y line, known in Europe as the E — P line. 
This is the oblique line dividing the above-men- 
tioned curve into areas. Its origin and location 
is as follows: 

The Area Theory, so-called, is simply a study of 
the areas formed by these two lines, viz. : the curve 
first mentioned and this X — Y line. In the plots 
published by the Babson Statistical Organization, 
the curve is located once a month, and the X — Y 
line once a year ; but both the curve and the X — Y 
line theoretically change every day. The curve 
changes in accordance with the various economic 
movements above mentioned, while the slope of the 
X — Y line changes in accordance with the net 
growth of the country, and thus is dependent upon 



402 BONDS AND STOCKS 

crops, politics, etc. Practically speaking, the 
curve is the combination of a large number of 
subjects, and represents monthly activity, while 
the X — Y line is based on the net growth of the 
country as determined by previous areas. Each 
year the slope of this X — Y line is temporarily 
fixed by a study of bank clearings and other fac- 
tors. This correction, known as the annual cor- 
rection, is automatic. Furthermore, at the end of 
each cycle, say once in five or six years, an 
arbitrary correction is made by slightly raising or 
lowering the X — ^Y line so as to make the area 
above and below thereof equal for the completed 
cycle. This second correction is made on the 
assumption that ^'action and reaction are equal" 
when applied to business en masse, and hence 
would not be made by persons who claim not to 
grant this assumption. 

The condition of the money market and general 
business has long been shown by charts and curves ; 
but these all have been of little avail for correctly 
measuring changes, because, owing to the growth 
or decline of nations, conditions have varied or the 
standard of measurement has changed. The value 
of the Area Theory lies in the fact that these 
changed conditions are compensated for. This 
X — Y line acts like an automatic governor on an 
engine. The curve, of course, records the ^^ups 
and downs" of business as have the curves of other 
students; but the area formed by said curve and 
the X — Y line affords an opportunity to intel- 



CONCLUSION 403 

ligently read into the plot all the contributing 
factors. 

A Measure of Present Conditions and an 
Aid in Anticipating Future Conditions. 

When crops are good and politics constructive, 
the X — Y line automatically slopes upward 
enough to compensate for this additional growth 
to which business is entitled ; but when crops are 
poor, politics uncertain, or the country has met 
with some great disaster, the X — Y line slopes 
automatically downward. 

Therefore, it will be seen that the area com- 
posite plots differ even from other composite charts 
in two ways : ( 1 ) By being determined from the 
two factors of time and intensity (which, when 
multiplied, form an area) ; (2) by the fact that the 
area itself is being continually corrected by the 
X — Y line, the slope of which varies with the 
changes in crops, politics and other factors. Thus 
these area composite plots give a practical measure 
of present conditions, constantly adjusted to basic 
changes, and yet capable of comparison with pre- 
vious periods. 

At this point it should frankly be stated that 
the adoption of the theory of action and reaction 
as applicable to business is wholly an assumption. 
In other words, it can not now be proved that the 
law of action and reaction is applicable to business 
en masse. Such proof can come only with time. 
The Babson Statistical Organization frankly 



404 BONDS AND STOCKS 

assumes said law* as being applicable to business 
as well as to mechanics and other sciences and on 
this assumption bases its interpretation of the plots 
in anticipating future conditions. 

I^ot only do the areas formed as above described 
offer the best existing measure of present condi- 
tions ; but, by enabling one to compare present with 
normal conditions, the writer believes one is able, 
from the assumption of the law of action and reac- 
tion, also to anticipate future changes and thus 
foretell the great tidal movements in the security 
and commodity market. 

On this assumption, under certain conditions or rates of 
growth as determined by the X — Y line, if business develops 
normally above said line, it must later rest a corresponding 
amount below it in area. The over-extension of loans, over- 
production of merchandise or any other abnormal economic 
movement carrying the curve far above the X — Y line 
should, under this assumption, be compensated for by a 
similar movement of the curve below the X — Y line, unless 
the country grows enough to absorb this abnormal move- 
ment, which growth would result in the automatic raising 
of the X — Y line. In other words, we assume that for every 
action there must be an equal reaction, although the reac- 
tion may sometimes be absorbed through growth, and the 
shock be unnoticeable. On the other hand, after an abnor- 
mal period of contraction of loans and curtailment of pro- 
duction, during an area formed by the curve dropping far 
below the X — Y line, we believe that a compensating up- 
ward development of the curve will take place, unless the 
growth of the country is so retarded through crop failures. 



*During Sir Isaac Newton's active life, he applied this law of 
action and reaction only to mechanics, chemistry, astronomy and 
other sciences, but during his later life he entered into the study 
of theology and economics. If one will turn to page 388 of Sir 
Isaac Newton's Philosophical Discoveries, written by Maclaurin 
in 1748, it will be plainly seen what was in the mind of this, 
great philosopher. From the author's studies in England, he is 
absolutely convinced that Sir Isaac Newton thought that the 
same law of action and reaction could be applied to the acts of 
man en masse as to mechanics, chemistry, astronomy and, in 
fact, to every other science. 



COXCLUSION 405 

war, desolation or political disturbances as to result in 
lowering the X — Y line. In either case, we assume that the 
areas above and below the X — Y line should work out to be 
approximateh" equal, and thereupon base our opinions as to 
the probable course of future events. 

This tlieory relative to action and reaction is 
most easily nnderstood if one will remember that 
when an area is being formed above the X — Y line, 
it simply means that production is exceeding con- 
sumption and that manufacturers, merchants and 
consumers are becoming over-extended, purchas- 
ing more than they pay for; while an area below 
the line signifies that consumption exceeds produc- 
tion, and that manufacturers are reducing their 
stocks of merchandise, and that consumers are 
again beginning to save. Further, when the 
curve, representing business, coincides with the 
X — Y line, ideal conditions exist from an eco- 
nomic point of view. Production and consumption 
then balance except for the excess which is con- 
served as capital. The amount of the excess is 
shown by the slope of the X — Y line. The greater 
the slope upward, the more rapidly capital is being 
created ; while if the slope is dowuAvard, it signifies 
that the nation's assets are being consumed. 

Of course this theory relating to action and reac- 
tion can be applied more and more exactly as a 
greater number of people is considered. In fact, 
the application of Sir Isaac Xewton's law to eco- 
nomics is intimately related to the study of averages. 
It is impossible for one to estimate correctly what 
will be the length of life of any one reader of this 
book; but it is possible to estimate within a few 



406 • BONDS AND STOCI^S 

years what will be the average length of life of 
all who read this book. When considering 200,000 
people, the insurance expert can anticipate almost 
within a few days what the average length of life of 
said group will be. In the same way, action and 
reaction are equal in business and economic move- 
ments only when applied to the actions of the mass 
as a whole, and not to distinct trades or localities. 
Therefore, the area plot gives — (a) by curves 
the temporary movements of business; (b) by 
areas, automatically adjusted through the X — Y 
line to the growth of a nation, the real condition 
of business, showing the relation thereof to normal 
conditions; and (c) by the assumption of the 
theory of action and reaction in relation to the 
area movements, an intelligent forecast of future 
conditions. 

The Four Snccessive Steps. 

In conclusion, the preparation of these area 
composite plots consists of four parts; (1) the 
combining of many different economic indicators 
into one curve; (2) the use of an area instead of 
a line in order to consider the effect of both inten- 
sity and time; (3) the correcting of the result as 
shown by this area in accordance with the growth 
of the country; and (4) the anticipating of future 
conditions in accordance with the theory of action 
and reaction. The first three parts of the work 
are simply mathematical calculations to which no 
exceptions are generally taken. The fourth part 
of the work is based on the assumption of the 



CONCLUSION 407 

theory of action and reaction, the correctness of 
which only time can prove. 

Hence, after these composite area plots have 
shown an abnormal area above the line X — Y, a 
corresponding area below the line should, under 
normal conditions, follow if this theory is correct 
and the line is properly located. Such an area 
below would mean a depression preceded by more 
or less panicky conditions and followed by low 
money rates. On the other hand, after such an 
area has developed heloiv the X — Y line, one may, 
according to this theory, expect an area above to 
follow, which would be an area of prosperity, 
preceded by active stock market conditions with 
rising stock prices and followed by a period of 
tight money and declining bond prices. In other 
words, if this action and reaction theory applied to 
business is correct, a heavy volume of business with 
high money rates and low bond prices should come 
at the end of a prosperity area as the curve is cross- 
ing the X — Y line ; while a light volume of busi- 
ness, low money rates and high bond prices should 
come at the end of a depression area, as the curve 
is crossing the X — Y line on its upward swing. 

Of course, there are instances when the students 
of the area theory are more or less at sea, such as 
when the curve hovers for some time in the vicinity 
of the X — Y line near the end or the beginning 
of a permanent movement. If the curve drops 
down to the normal line when the area above has 
apparently been about three-quarters consumed, 
the most thoughtful student dares not state whether 



408 BONDS AND STOCKS 

the next immediate movement ^will be above or 
below the X — Y line. Similar conditions, how- 
ever, confront all scientists whether in the field of 
phjsicSj chemistry or astronomy. 

A further study has been made, segregating the 
present composite plot, as now published by my 
organization each w^eek, into two plots, each cover- 
ing twenty years; one series of areas containing 
subjects which under normal conditions show 
growth, such as bank clearings, railroad earnings, 
etc., and the other series of areas, which under 
normal conditions do not show growth, including 
subjects such as money rates, surpkis reserve, etc. 
This segregation of the various subjects into these 
two groups with two X — Y lines, a sloping line 
for the growth subjects and a level line for the 
non-growth subjects, is showing some extremely 
interesting developments and is likely to open a 
new and extended field of research with a most 
practical application. 

Application. 

As it therefore is possible to study fundamental 
conditions along the lines above indicated and thus 
take advantage of the long swings, the writer 
earnestly advises readers to have nothing to do 
with either of the first two forms of investment 
mentioned in Chapter III, but confine his pur- 
chases either to high-grade bonds for permanent 
investment, or else to high-grade stocks which 
should be bought and sold about once in three or 
four years in accordance with what the area theory] 



CONCLUSION 409 

indicates. The portion of the reader's money 
which he desires to invest in bonds, he should 
invest at the very end of a period of prosperity 
when money rates are very high and the outline of 
the area is coming downward, crossing the line 
X — Y preparatory to forming an area below the 
line. This is the time, as shown by the dotted line 
on the annexed chart, to buy bonds, and usually 
an investor is best off by purchasing only at such 
times and then onlv such hio-h-p'rade bonds as are 
listed and actively traded in on the xs'ew York 
Stock Exchange. Such listed bonds are abnor- 
mally high during periods of high prices when the 
investor is better off by purchasing unlisted, inac- 
tive bonds; but they are abnormally low during 
periods of decline. Hence, when it is the proper 
time to buy bonds, one can usually find better 
bargains among the listed bonds than among the 
unlisted bonds. 

The portion of the reader's money to be invested 
in stocks should likewise be invested only, say once 
in three or four years, during the slump which 
invariably comes in the early part of an area below 
the X — Y line, as is clearly sho^vn. by the red solid 
line on the annexed chart. At this time, when 
every one else is blue and pessimistic, the reader 
should step in and purchase all he possibly can of 
the highest-grade stocks, paying for them outright, 
and then ^^sit tight." With reliance on Sir Isaac 
iMTewton's law, the investor should rest assured that 
an area will surely develop below the X — Y line 
to counterbalance the areas above, during which. 



410 BONDS AND STOCKS 

time money rates will ease up, funds will accum- 
ulate, investment will be on tlie increase and stock 
prices will rise. This increase in prices will con- 
tinue until another area begins to develop above 
the X — Y line, when an investor should sell his 
securities at the high point, also shown by the red 
solid line on the annexed chart. Of course, when 
such a time comes, brokers and friends may insist 
that the nation is just entering a period of pros- 
perity, and instead of selling stocks, it is time to 
buy more, but never mind, — pay no attention to 
such advice. The time to sell is in the early part 
of the area of prosperity before the other fellow 
sells, just the same as the time to buy is at the 
beginning of an area of depression before the 
other fellow begins to buy. 

It is true that this takes courage, as by nature 
we are all apes and it is difficult to go against 
everybody's advice and do differently from what 
other people are doing. However, the only way to 
make money in the stock market is to be the one 
man in a hundred to do differently from the ninety- 
nine, and this means that we should buy when 
panic reigns and everybody else is thoroughly pessi- 
mistic, believing that the market is going lower, 
and we should sell when everybody else is very 
optimistic, believing that the market is going 
higher. As above explained, one should be able 
to do this by studying the composite plots prepared 
on the Area Theory. If, however, you are not 
willing to study fundamental conditions by this 
Area Theory and have not the courage to act in 



CONCLUSION 411 

accordance with what said Area Theory indicates, 
then you had better confine jonr investments to 
bonds, becoming a permanent investor, so-called, 
and not purchase stocks for any purpose. 

The Kind of Stocks to Buy. 

Although the writer has given minute instruc- 
tions in the preceding chapter for the selection of 
securities, yet, personally, he believes the reader 
would be very much better off to give his attention 
to studying fundamental conditions as evidenced 
by the Area Theory than to analyze corporation 
reports, endeavoring to ascertain what stocks to 
buy and when not to buy. During a panic it is 
safe to buy any of the good stocks and, moreover, 
it is important to buy a broad list of — say ten to 
twelve of the established but active dividend 
payers. Many men think that they are wise in 
confining their investments to one or two stocks 
which they believe are due, for certain reasons, to 
a special rise. In the writer's opinion, it is a 
mistake to figure on anv such information, or, in 
fact, any inside tips. When the time comes to buy, 
purchase a broad list such as the above. Some 
will go up more than others ; some may not go up 
at all, but the list as a whole will show a handsome 
profit. ^Yhen one confines his investments to only 
one or two stocks, he takes a decided risk, and the 
only way the writer has made money is by elimi- 
nating all risks. 



412 BONDS AND STOCKS 

When to Sell. 

We usually, however, do not have so much 
trouble in getting clients to buy as we do to get 
them to sell. It seems to be difficult for the 
investor to be willing to sell when every one else is 
optimistic, or to forego his dividends by leaving 
his money on deposit in a bank for two or three 
years at a low rate of interest. Nevertheless, the 
only way to have money with which to buy during 
a panic is to sell out when stocks are high and to 
keep this money in liquid form for two or three 
years until this panic comes. Of course, it need 
not all be kept on deposit in banks, but much of it 
can be invested in short-term notes, commercial 
paper, etc. In making such investments, however, 
during the period of prosperity while waiting for 
a panic, the investor should give no attention to 
rate, but purchase only the highest-grade short- 
term notes and the highest-grade commercial 
paper which can be liquidated or sold at any time 
without loss. Nine-tenths of the losses which 
occur to investors are due to their desire for too 
high a rate of interest, and this is a special tempta- 
tion for the man who is endeavoring to take 
advantage of the long swings. He hates to let the 
money lie idle and uninvested for two or three 
years, waiting for a panic. Nevertheless, this is 
the only way to play the game successfully. In 
order to have money to invest during a panic, one 
must liquidate months, or perhaps years, in 
advance. 



CONCLUSION 413 

This chapter represents the honest conviction of 
the author on investing money, although he is well 
aware that it is not an acceptable doctrine to bond 
houses and brokers who are dependent on a con- 
stant business from day to day and from month 
to month. 



IS^DEX 415 



INDEX 



Ability 383 

Accountant 20 

Accounts 14, 17, 21 

Accounts receivable 81, 82 

"Accrued" or "And Interest" 66, 67, 299 

Advertisements 52, 57, 77, 78, 79, 144 

Advertising 135 

Advice 12, 15, 18, 31, 50, 72, 142, 241, 288, 328, 333, 388 

Advice from banks 291 

Amalgamated Copper Company 331 

American stocks ■ 138 

Amount earned on the stock 175 

Analysis 143, 153 

Annual charges per capita in the United States 218 

Assessed valuation as compared to actual values 262 

Assessment 25, 137, 253, 300, 301. 305 

Assets 23, 24, 25 

Assignment 61 

Assumed bonds Ill, 112 

Area Theory (see Chap. XXIII) 

Average life of a gold or silver mine 330 

Average price 94 

Bank 10, 17, 19, 78, 82, 85 

Bank account 12, 15, 18, 30 

Bank employees 19 

Banking house 21 

Bankruptcy 103 

Bank statement 22, 23, 25, 27, 348 

Best bonds to buy. 148 

Bid price 27 

Book value 27 

Bond dealers 79 

Bonded debts 153 

Bondholders 78, 97, 98, 295, 300 

Bondholders' committee 124, 296, 303 

Bond house 17,36 

Bond 54, 62, 06, 70, 98, 99, 100, 121, 123, 128 

Bonds 17, 61, 72, 75, 77, 86, 101, 129, 238 



416 BONDS AND STOCKS 



Bonds of street railway companies 199, 203 

Bond salesman 36, 65 

Bonus 71 

Borrower 77 

Boston Terminal bonds 253 

Babson Statistical Organization (see Chap. XXIII) 

Calumet & Heela 310 

Callable .72, 74, 75, 76 

Call rates 340, 342 

Call money 343, 344 

Card system „ 141, 142 

Capital „ 51, 80, 84, 135 

Capital account 166 

Capital stock 81 

Car and train loading 164 

Central Labor Union 359 

Certificate 53, 59, 60, 61, 62, 99 

Certificate of deposit 297 

Certificate of stock ■ 60 

Character , 12, 46 

Character of construction 242 

Character of population 274 

Character of traffic 100 

Character of assets 23 

Charter 190, 191, 213, 214 

Chattel mortgage 116 

Check 29, 34, 59 

Checking account 11, 14, 16, 28, 29 

Chicago Union Traction Company 194 

Circular 79 

City of Boston bonds 118, 254 

Classes of bonds 100 

Classes of franchises 191 

Classes of stocks 311 

Clientele 122 

Closed mortgage 217 

Coal supply 236 

Collateral. 110, 112, 113, 302 

Collateral trust bonds 110, 111, 112, 157 

Commercial bank 14, 16, 17, 36 

Commercial paper 38, 41, 78, 80, 81, 83, 84 

Commercial failures 81 

Commission 33, 119, 120, 121, 125, 126 

Commodity 82 

Common stock 174 



INDEX 417 

Competition 124, 108. 21G, 210, 220, 224, 22G, 227. 230 

Comptroller of the Currency 20, 22 

CoiiconLiatiiig- tlie 1 1.-5K 1)2 

Conduits 229 

Confidence of the community 2G, 27 

Consolidated mortgage bonds 103, 104, 157 

Conservative bonds 148 

Construction 142 

Contingent liability 270 

Convertible bonds 105, 109, 114, 115, 149, 157 

Conversion pn\ ilege 150 

Convertibility 233 

Corporation 77, 81, 83, 97 

Copper 82 

Copper dividends 312 

Correct yield 71 

Credit 10, 12, 13, 14, 15, 75, 82, 83, 85 

Creditors 83 

Credit deposit 349 

Credit ratin^f^ 274 

Cost of operation 238 

Cost of electric power .238 

Cost per horse power 240 

Coupons 53, 54, 58, GO, 62, 06, 68, 75 

Coupon bond 64, 65 

Composite plot (see Chap. XXIII) 

Debenture bonds 110, 112, 113, 157 

Deceptive practices 24 

Defaulted bonds 07, 287, 294, 290, 298, 300, 304 

Demand for monej" 127 

Denomination \ 57 

Density 169 

Depression period (see Chap. XXIII) 

Deposit agreement 296 

Depositors 23, 38 

Depository 296 

Depreciation 171, 220, 231, 233 

Deterioration of plant and equipment 231 

Developments 313 

Discount G9, 72, 82, 128 

Distribution of risk 87, 91, 93, 96 

Diversification 94^ 234 

Dividends 59, G8, 134, 329', 330 

Dividend requirements 170 

Earnings of gas companies 215 



418 BONDS AND STOCKS 

Earnings of lighting companies 215 

Earnings (Gross) 156, 159, IGO, 171, 174, 179, 230 

Earnings (Net) 156, 159, 171, 174, 230 

Earnings and management 197, 211, 214, 225, 226 

Earnings of a street railway in times of panic 200 

Earning power 170 

Earnings of telephone companies. 218 

Earnings on stock 173, 175 

Edison on the effects of the increased gold production. . . .370 

Electric tireless cooker .211 

Electric lighting companies. 207 

Electric railway securities 200, 243 

Engineer's report 78 

Engineering organizations 132 

Entry 99 

Equity 70, 104, 129, 157 

Equipment bonds 106, 109, 115, 156 

Erie Telegraph & Telephone 227 

Escrow 79 

European investors 138 

Excess of the debt limit 262 

Exchanging stocks 285 

Exclusive franchise 192 

Experience 51, 381 

Extension 85 

Extended bonds 105, 106 

Factor of safety 152, 154 

.Financial statement 85 

Financial stringency 23 

First consolidated mortgage bonds 101 

First mortgage bonds 101, 103, 104, 108, 156 

Fireless cooker 205, 210 

Fixed charges 154, 158, 171, 179 

Flat price 67 

Floating debt 113 

Flow 241, 247 

Flowage 239 

Fluctuations of the flow 249 

Foreclosure 100 

Foreign investors 137 

Foreign exchange 342 

Foreign purchasers 118 

Frauds 131 

Franchise. .190, 191, 193, 194, 195, 196, 19/, 212, 216, 225, 229 
Franchise and property value 197 



INDEX 419 

Franchise and replacement value 211, 225 

Free advice 144 

Freight car per mile figures 170 

French investors 32, 51 

French savings bank 31 

Fundamental business conditions 1S4 

Fundamental conditions 11, 26, 40, 43, 48, 49 

Fundamental principles 40, 51, 348 

Fundamental statistics 144 

Funds 84, 105 

Forecasting conditions (see Chap. XXIII) 

Galveston 267 

Gas bonds 208 

Gas companies 209, 210, 213 

Gas securities. 208, 211 

Gauging stations 241 

General expenses 162, 163 

General mortgage 104, 157 

General mortgage bonds 102, 103 

General opinion of the community 22 

Gold and silver mines 331 

Gold production 355, 360, 362, 367, 368, 370, 376 

Gold standard 372 

Gold theory 356, 358, 362, 365, 373 

Government and municipal bonds 188 

Gravel road bonds 268 

Grouping of railroads 181 

Guarantee 79, 80 

Guaranteed bonds 79, 1 1 1 

Guaranty , 112 



Hammocks 84 

Handbooks 329 

Health 12, 46 

Heat 205, 206 

Honesty 23 

Horse power of the stream 239, 240, 247, 249 

Improvement bonds , 265, 270, 271 

Inactive listed bonds 120 

Income ^., 107, 158 

Income bonds ..."... 67, 157 

Improvements ". ' 237 

Indenture 115 

Independents 225 



420 BONDS AND STOCKS 

Indiana case 268 

Industrial companies 75, 216, 383 

Information 141, 142, 143 

Instruction courses on investments 97 

Intelligence 12 

Interest 16, 59, 60, 66 

Interest rates 361, 362, 368 

Intercommunication 224 

Interchangeable 63. 65 

Interurban street railways 198 

Interpreting , 22 

Investors 15, 17, 44 

Investment 99 

Index numbers of business (see Chap. XXIII) 

Joint bonds Ill, 112 

Judgment 12, 383 

Junior issues , 105 

Kind of stocks to buy (see Chap. XXIII) 

Land grant bonds 107, 109 

Leased lines 177 

Legal opinion. : 77, 78, 115 

Legality 77, 263, 268 

Lighting securities 206, 209, 212, 216 

Lighting franchises 212 

Lien 82 

Liability 270 

Lighting companies 91, 92, 211, 213, 214, 215 

Limited franchise 191, 193, 196 

Limit of debt 262 

Limitations and loopholes 261 

Listed bonds 121, 122, 124, 126 

Listed issues 118, 119, 129, 136, 139, 311 

Listing requirements 139 

Loans 85 

Location 242 

Long swings 144 

London stock exchange 117 

Law of averages as applied to area theory (see Chap. XXIII) 

Maintenar ce 155, 160, 166, 170, 172, 220 

Maintenance expenses 74, 165, 170 

Maintenance of equipment 162, 168, 169, 171 

Maintenance of way and structures 162, 167, 1()8 

Management 22, 199, 210 

Manual 379 

Manufactured rumors 143 



INDEX 421 

Manufacturing corporation 216 

Margin 40, 174 

Margin of profit 238 

Margin .purchases 45 

Mai gin of safety 25, 1G5, 175, 176, 177 

Market for the electricity 243 

Market letters 142, 144 

Massachusetts Acts 259 

Maturity 128 

Merchant's profit 124 

Mines , 316, 332 

Mining companies 314 

Mining engineer 326, 334 

Mining stocks vs. mining properties 323 

Misleading advice 142 

Money rates 338 

Moody's Manual 140 

Monetarv conditions 344 

Moral liability 123 

Moral risk 85 

Mortgage 53, 77, 78, 79, 97, 98, 107, 163 

Mortgagee 77, 78 

Mortgage bonds 77, 100 

Mortgage equipment 156 

Mortgagor 78 

Municipal bonds 252, 254, 256, 258, 205, 268, 270, 271, 274, 301 

National bank 16 

Native lake copper 316 

Net earnings 156, 159, 174, 230 

New business 230 

New enterprises 379, 387 

New Haven bonds 32 

New inventions 209 

New mines 332 

New York bank statement 37 

New York Stock Exchange 119, 120, 121, 130, 131, 138 

Niagara Falls plant 244 

Notes 53, CO, 03, 77, 78, 81, 82, 85, 98, 157 

Non-callable 72 

Newton, Sir Isaac (see Chap. XXIII) 

Obligation 70 

Oflficial Information Bureau 141 

Oflficial lists 120 

Ohio case relative to municipals 268 

Operating expenses 155, 161, 163 



422 BONDS AND STOCKS 

Operating ratio 159, 160, 162 

Optional bonds 74, 75 

Ores (low grade) 367 

Other income 159 

Output and supply of gold 368 

Over-capitalization .224, 245 

Overbought and oversold market (see Chap. XXIII) 

Passenger car per mile 170 

Panic 105 

Par value 68 

Paving and sewer bonds 268 

Peak of the load 80, 84 

Percentage earned on the stock 173 

Percentage of loans to deposits 345, 347 

Percentage of the gross earnings 160 

Per mile of road 168 

Permanent improvements 254 

Permanent investor 45, 46 

Perpetual franchise 191, 192 

Physical conditions 384 

Physical property 228 

Pig iron .82 

Plain registered bonds 63 

Points by Mr. Byron W. Holt 368 

Political factors 231 

Population 274 

Porphyry group 318 

Postal savings banks 30 

Post ofRce department 133 

Precedence 103 

Preferred stock 174 

Preferred stocks with relation to the gold theory 362 

Premium 68, 72, 128 

Primary 24 hour power 239 

Principal 53, 54, 59, 60, 63 

Principle of distribution 89 

Priority of liens 172 

Prior liens 103, 156 

Prior lien bonds 103, 104, 156 

Producers and dividend payers 311 

Producers and non-dividend payers 311 

Profit 174 

Promoted companies 223 

Promoters 379 

Prospects 314 

Protected position 104 



INDEX 423 

Public utility commission 245 

Public utility bonds 233, 234 

Purpose of municipal bonds 254 

Preparation of Composite Plots (see Chap. XXIII) 

Qualit j^ of assets 22 

Quick assets 3:V.) 

Quotations 11!) 

Railroad bonds 146, 147 

Railroad companies 300 

Railroad report 173 

Railroad securities 146 

Railroad stocks 94 

Rates in large cities 341 

Rate of interest 68, 69 

Real deposit 349 

Real estate 18, 79 

Real estate investments 146 

Receivables 82, 83 

Receiver 146, 155 

Receivers' certificates 150, 300 

Record of the flow of the Hudson river 248 

Records of the stream 241 

Redeemable 72, 76 

Redemption 73 

Refunding bonds 107, 152 

Refunding mortgage 107, 157 

Registered bond ; . . 65 

Registration 62 

Registration as to principal only 63 

Registration as to principal and interest 63 

Relation of deposits to capital 22 

Relation of deposits to capital, surplus and undivided 

profits 25 

Reorganization 113, 124, 137, 157, 195 

Replacempnt value. .189, 195, 197, 198, 199, 204, 212, 214, 226 

229, 230 

Reserve r .79 

Retired clergyman 385 

Rights and privileges 239 

Rising prices of commodities 320, 369, 389 

Rule for purchasing bonds 104, 105 

Rule for the permanent investor 127 

Rule of thumb relative to fundamental conditions 26 



424 BONDS AND STOCKS 

Salesman 16, 43, 65 

Savings II 

Savings bank 14, 17, 29, 30 

Seasoned bonds 44, 48, 294 

Seasoned securities 378, 386 



Security 85, 188 

Security of street railway bonds 188 

Selecting a bond dealer 122 

Serial Bonds 73 

Share 98 

Short term notes 42 

Sinking funds 72, 73, 74, 75, 76, 330 

Special assessment bor.ds 268, 269, 270, 272 

Special assessment 265 

Speculation 310 

Speculative bonds 152 

Speculators 33, 41 

Subscription books 33 

Sunday papers 131, 144 

Summary 389 

Surplus 21, 84, 155, 164, 170, 174, 176 

Surplus and undivided profits 22 

Surplus earnings 104, 194 

Surplus left for dividends 165 

Surplus reserve. . , 350 

Sulphide ores <. 317 

Standard of value 354 

Standard requirements 86 

State banks 19 

Statement 19, 20, 21 

Statistics 39 

Statistical department 140 

Stock 59, 60, 61, 62, 68, 70, 98, 100, 128, l2y, 175 

Stockholders 26, 97, 98, 295, 300 

Stock certificates 59, 61 

Stock conversion figures 151 

Storage reservoirs 241 

Street railway companies 196, 197, 201, 213 

Street railway securities 188, 197, 212 

Student 35 

Study 35, 42, 47, 48, 51, 172 

Study of investments 16 

Swindling operations 133 

Stock market movements (see Chap. XXIII) 

Taxes .54, 252 



INDEX 425 

Technical condition 41 

Telephone 227, 231 

Telephone bonds 233 

Telephone competition 219 

Telephone earnings 219, 225 

Telephone securities 92 

Ten stocks 95 

Terminal bonds 107, 109 

Terminable franchise 191 

Territory 160, 167 

Tests of new enterprises 379 

Texas municipal bond 259 

Third mortgage 102 

Third mortgage bonds lo7 

Theoretical analysis lo3 

Theoretical income 71 

Time money 340, 343, 344 

Time rates 343 

Tipsters 144 

Total gross income 171 

Total net income . .171 

Traffic 23, 163, 167 

Traffic expenses 161 

Train mileage 164 

Transfer 61 

Transfer blank 62 

Transferable by delivery 56 

Transmission 244 

Transportation 163 

Transportation expenses 161 

Trustee 53, 77, 78, 101, 110, 208, 295 

Trust agreement 296 

Trust company 10, 19, 53, 77, 79, 97, 110, 111 

Trust companies receipts 295 

Twenty-four hour primary power 251 

Two main functions of banking 37 

Underlying liens 74, 79, 86, 105, 172 

Underlying bonds 104, 107 

Underwriter's commission 33 

Undivided profits 21 

Unlisted bonds 124, 126 

Unlisted securities 117 

Unlisted stocks , 129 

United States Geological Survey 241 

United States Government bonds 76 



426 BONDS AND STOCKS 

Unseasoned securities , 386 

Variations in the flow of the river 240 

Velocity method 247 

Voting power 130 

Wages 358, 360, 369 

Water power 237, 239, 240, 243, 244, 247, 248 

Water power bonds 245 

Water power securities 236, 238 

Water rights 239 

Weight of a cubic foot of water o 250 

Why the cost of living increases 358 

Witness .62 

Wool houses 83 

Wool , 84 

Working capital 300 

Worthless stock certificates 139 

Write up , 143 

X— Y line (see Chap. XXIII) 

Yield 68, 70, 71, 72, 149, 320 

Young investor « 15 



